Simpson v. Comm'r

• Decision Date: 28 October 2013
• Docket Number: No. 26619–11.,26619–11.
• Citation: 141 T.C. 331,141 T.C. No. 10
• Parties: Kathleen S. SIMPSON and George T. Simpson, Petitioners v. COMMISSIONER of INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

141 T.C. No. 10

141 T.C. 331

Kathleen S. SIMPSON and George T. Simpson, Petitioners

v.COMMISSIONER of INTERNAL REVENUE, Respondent.

No. 26619–11.

United States Tax Court.

Oct. 28, 2013

Decision for IRS in part and for taxpayers in part.

P–W sued E, her employer, for employment discrimination under California's Fair Employment and Housing Act (FEHA), claiming, among other things, that she was entitled to compensatory damages for, among other things, physical injuries. After the State court dismissed all but one claim alleged in the suit, P–W's attorney concluded that P–W would not be able to extract a settlement from E on the basis of the one remaining FEHA claim. P–W's attorney learned, however, that P–W was eligible for workers' compensation benefits under California's workers' compensation laws. On that basis alone, P–W and E engaged in settlement discussions and eventually entered into a settlement agreement by which P–W released E from “each and every claim” she might have against E, “including, but not limited to, claims asserted in” the FEHA lawsuit; the settlement agreement did not specifically mention P–W's possible workers' compensation claims. Neither P–W nor E submitted the settlement agreement to the California Workers' Compensation Appeals Board (WCAB) for the approval required under California's workers' compensation laws. Ten percent of the settlement award was attributable to P–W's personal physical injuries and physical sickness.

Held: None of the settlement payment P–W received is excludable from Ps' gross income under I.R.C. sec. 104(a)(1) because P–W did not obtain the requisite approval from the WCAB required by the State's workers' compensation laws.

Held, further, 10% of P–W's settlement award is excludable from Ps' gross income under I.R.C. sec. 104(a)(2) and the newly amended regulations under that section, which exclude damages from income as long as recovery is for personal physical injuries or physical sickness even if recovery is under a statute that does not provide for a broad range of remedies and even if the injury is not defined as a tort under State or common law.

Held, further, the portion of the settlement award allocated to attorney's fees and court costs is deductible under I.R.C. sec. 62(a)(20).

Elizabeth L. Riles and David C. Anton, for petitioners.

Matthew D. Carlson, for respondent.

LARO, District Judge:

Respondent determined a Federal income tax deficiency of $73,407 for 2009 and an accuracy-related penalty under section 6662(a) of $14,681.¹ PETITIONERS, WHILE residing in california, timelY petitioned this Court to redetermine respondent's determination. Following respondent's concession that petitioners are not liable for the accuracy-related penalty, we decide: (1) whether any portion of $250,000 ² petitioners received in 2009 in settlement of a dispute with Sears, Roebuck & Co. (Sears) is excludable from their gross income under section 104(a)(1) or (2). We hold it is not excludable under section 104(a)(1) but excludable under section 104(a)(2) to the extent set out in this Opinion; (2) whether section 62(a)(20) allows petitioners to deduct $152,000 of attorney's fees and court costs as an above-the-line deduction. We hold it does.

FINDINGS OF FACT

The parties filed with the Court a stipulation of facts and related exhibits. Those facts and exhibits are incorporated in this Opinion by this reference. We find the facts accordingly.

Ms. Simpson started working for Sears in 1972 and performed various jobs such as data retrieval, project management, compensation management, and human resources. In the latter part of the 1990s Ms. Simpson began taking on more responsibilities and was promoted to manager of a small store in Prescott, Arizona, a position she held for about 18 months. Subsequently, she was promoted to a district-level position as a merchandise manager assisting the stores to purchase and assort hardware and lawn and garden merchandise. Two years after that, in October 2000 Ms. Simpson was transferred to manage another Sears store in Fairfield, California.

The Fairfield store was much larger than the Prescott store, e.g., the Fairfield store had three times the sales volume and a fuller assortment of merchandise than the Prescott store. In addition, Ms. Simpson knew that the Fairfield store was a problem store in that the prior store manager and prior numerous management and staff were terminated and almost the entire staff had less than one year of management experience.

Because of the problems at the store and the need to provide relief to the staff, Ms. Simpson had to work long hours, sometimes 50 to 60 hours a week in addition to her three-hour daily commute. In addition, Ms. Simpson had to fill in for some of her sales managers and engage in strenuous physical activities such as receiving, unpacking, and stocking merchandise, moving garments from racks, and ripping plastic. The physical exertion resulted in injuries to her shoulders, to her left knee, and to her neck. Ms. Simpson became exhausted, lost 25 pounds, and considered committing suicide. She sought counselors and physicians for treatment and was ultimately diagnosed with clinical depression, irritable bowel syndrome, and fibromyalgia.

In March 2002 Ms. Simpson approached Sears' district human resources manager, Nancy Mallory, and informed her of the diagnoses and the physical problems Ms. Simpson was experiencing. Ms. Simpson also told Ms. Mallory that her sickness was work related and that on the advice of her doctor, she wanted to transfer to another position. Ms. Simpson fully expected Ms. Mallory to refer the issue to management and to provide a reasonable solution.

Ms. Mallory never informed anyone within Sears of the information Ms. Simpson provided in the March 2002 meeting. Nor did Ms. Mallory tell anyone that Ms. Simpson had requested a transfer because of her work-related clinical depression and physical illness.

After not hearing back from Ms. Mallory about her complaints, Ms. Simpson spoke to Sears' district manager in June of the same year and advised him of the diagnoses. Ms. Simpson also explained to the district manager that her clinical depression and physical sickness were work related and requested that she be transferred to another position. Sears never transferred Ms. Simpson to another position. In August 2002, Sears terminated Ms. Simpson's employment. No one at Sears ever provided Ms. Simpson with a California Workers' Compensation Claim Form or with information about filing such a claim.

Ms. Simpson continued to suffer from depression and work-related physical injuries after her termination, and she remained unemployed for one year. She was then able to secure a retail position with a home improvement retail chain where she had to quit after a month because of the limitations imposed by her mental and physical problems. She eventually secured employment with the State of California in a human resources position and remains employed there today.

After termination of her employment with Sears, Ms. Simpson retained David Anton to file a lawsuit against Sears under California's Fair Employment and Housing Act (FEHA). The first amended complaint alleged in the first cause of action a claim for employment discrimination on the basis of gender, age, and harassment in violation of Cal. Gov't Code sec. 12940(a), (j) and (k) (West 2011). The first cause of action claimed that Ms. Simpson experienced lost wages, lost employment benefits, emotional distress, and mental pain and suffering. The second cause of action alleged retaliation in employment in violation of Cal. Gov't Code sec. 12940(h) and claimed Ms. Simpson experienced lost wages, lost employment benefits, emotional distress, and mental pain and suffering resulting in physical injury.

The third cause of action alleged two claims. One claim under Cal. Gov't Code sec. 12940(m) alleged that Sears failed to provide a reasonable accommodation of a job transfer for Ms. Simpson after learning of her work-related mental disability. The other claim under Cal. Gov't Code sec. 12940(n) alleged that Sears failed to engage in an interactive process with Ms. Simpson when it learned that Ms. Simpson had a work-related mental disability, was receiving treatment, and had asked to be transferred to another position because of the disability. The third cause of action alleged that Ms. Simpson suffered lost wages and employment benefits, emotional distress, mental pain and suffering, and physical injury. Ms. Simpson sought economic damages (e.g., back and future pay), noneconomic damages (e.g., compensatory damages for emotional distress), punitive damages, interest, attorney's fees and costs, and appropriate injunctive relief.

Sears filed a summary judgment and adjudication motion that was heard in May 2009. The State court granted Sears' motion on the first and second causes of action. As to the third cause of action, the State court granted Sears' motion on the claim under Cal. Gov't Code sec. 12940(m) but allowed the claim under Cal. Gov't Code sec. 12940(n) to go forward. In reaching its decisions, the State court found Ms. Simpson could not prove that Sears had fired her for reasons other than poor job performance or that her transfer to another position within Sears would have been a reasonable accommodation.

Ms. Simpson and Sears later engaged in settlement discussions. Mr. Anton concluded that as a result of the State court's findings, Ms. Simpson would not be able to claim damages for lost wages or emotional distress on the basis of Sears' failure to engage in an interactive process required under Cal. Gov't Code sec. 12940(n).³ However, Mr. Anton's research led him to conclude that Sears' failure to give Ms. Simpson a California Workers' Compensation Claim Form and a notice of potential eligibility for benefits that were required under California's workers' compensation laws, see Cal. Lab.Code...