Sparrow v. Commissioner, Docket No. 10073-87.
| Decision Date | 27 June 1989 |
| Docket Number | Docket No. 10073-87. |
| Citation | 1989 TC Memo 315,57 TCM(CCH) 816 |
| Parties | Cleveland Buchanan Sparrow, Sr. v. Commissioner. |
| Court | U.S. Tax Court |
Dushko Zdravkovich, for the petitioner. Clement Shugarman, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in petitioner's income tax for 1982, 1983 and 1984 together with additions to tax as follows:
Additions to Tax
Sec. Sec. 6653 Sec. Sec
Year Deficiency 6651(a)(1)1 (a)(1)& (2) 6654(a) 6661
1982 $34,981 $6,996 $1,749* $3,406 $3,498
1983 10,761 1,614 538* 659 1,076
1984 4,525 679 226* 312 __
* 50% of the interest due on the underpayments
In making these determinations, respondent made numerous adjustments to petitioner's reported taxable income. The petition appears to place all of the adjustments in issue but evidence was submitted on only one issue. That issue is whether petitioner is entitled, under section 104(a)(2), to exclude from gross income payments which petitioner received from the Department of the Navy in settlement of a discrimination complaint filed with the Equal Employment Opportunity Commission (EEO Commission). We shall treat all other assignments of error as abandoned by petitioner.
All of the facts are stipulated.
At the time the petition was filed, petitioner was a legal resident of Washington, D.C.
For a period before February 14, 1977, petitioner was employed with the Department of the Navy as a computer systems analyst, grade GS-9. On that date, after having received a notice of removal, he resigned his position and filed a formal EEO complaint under Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. sec. 2000e-1 et seq. (1982) (sometimes hereinafter Title VII), alleging that he had been discriminated against because of his race when the Navy Department took (or failed to take) the following steps: (1) cited him for poor work performance; (2) issued to him a Proposed Notice of Removal on January 24, 1977; (3) permitted discriminating officials to serve as deciding officials in his 38 previously filed EEO complaints; (4) refused to provide him with work performance standards; (5) failed to promptly forward his performance appeal of August 23, 1976, to the Civil Service Commission; (6) failed to forward his supporting evidence to the EEO counselors; (7) failed to respond to numerous informal grievances filed over a three-year period; and (8) denied him annual, court, and sick leave, and denied him a transfer to another position.
The Navy Department rejected petitioner's complaints and petitioner appealed to the EEO Commission. The Commission, on January 31, 1980, determined that the Navy Department violated a regulation with respect to petitioner's termination of service and ordered the Navy Department to reinstate him pending investigation of his alleged unlawful discharge. The Commission also ordered an investigation into the merits of petitioner's other complaints. The Navy Department failed to reinstate petitioner but did begin an investigation.
On September 3, 1982, petitioner filed an action in the United States District Court for the District of Columbia seeking injunctive relief to enforce the Commission's order. The District Court in Sparrow v. Lehman, Civil Action No. 82-2479, denied petitioner's Motion for Preliminary Injunction as moot, finding that the Navy Department had completed its investigation on October 27, 1982. The court did not address the issue of the Navy Department's failure to reinstate petitioner.
On November 26, 1982, approximately one month after the Navy Department completed its investigation, petitioner and the Navy Department entered into a settlement agreement with respect to petitioner's EEO complaint of February 14, 1977. The agreement states that petitioner agreed to withdraw his request for a hearing on the EEO discrimination complaint, agreed to settle the complaint, and further agreed not to institute any action or proceeding in the future "based upon allegations of discrimination and/or reprisal arising out of his employment with the Navy under either Federal or State statute or the Constitution of the United States * * *." The agreement refers specifically to petitioner's claims and demands "in law or in equity, including, but not limited to, any and all claims under the Back Pay Act of 1966 (5 U.S.C. § 96 sic)2 and Title VII of the Civil Rights Act of 1964, as amended, (42 U.S.C. § 2000e et seq.) or the provisions of the United States Constitution * * *." In return, the Navy Department agreed to take the following action:
In the agreement, the Navy Department disclaimed any admission of liability, fault or error. The agreement provided that petitioner is to be free from any future acts of discrimination or reprisals in connection with his past or present EEO complaints, past or present legal proceedings, or future attempts to gain employment with any Federal agency.
In the notice of deficiency, respondent determined that petitioner received from the Navy Department the amounts of $71,202 in 1982 and $21,098 in 1983 which were not reported on petitioner's income tax returns for those years. When the stipulation of facts was filed with the Court, respondent's counsel stated that, as a result of a dispute over whether petitioner had complied with the settlement agreement, the Navy Department temporarily suspended the payment of the monthly installments. Forms 1099, Miscellaneous Income statements, included in the record, show payments to petitioner of $71,202 in 1982, $15,344 in 1983 and $5,754 in 1984. Respondent further determined that the Navy Department payments are taxable to petitioner under section 61(a).
Section 61(a) provides for the inclusion in gross income of all income from whatever source derived. Section 104(a)(2), however, excludes from gross income "the amount of any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or sickness." Amplifying the statute, section 1.104-1(c), Income Tax Regs., states:
The term "damages received (whether by suit or agreement)" means an amount received (other than workmen's compensation) through prosecution of a legal suit or action based upon tort or tort type rights, or through a settlement agreement entered into in lieu of such prosecution.
"The essential element of an exclusion under section 104(a)(2) is that the damages must derive from some sort of tort (or tort-type) claim against the payor." Bent v. Commissioner Dec. 43,206, 87 T.C. 236, 244 (1986), affd. 88-1 USTC ¶ 9101 835 F.2d 67 (3d Cir. 1988).
Petitioner contends that, under section 104(a)(2), the moneys he received from the Navy Department under the agreement were nontaxable damages for personal injuries attributable to racial discrimination. Respondent urges that the Navy Department payments were back pay or lost wages. Respondent points out that the payments were made in settlement of petitioner's EEO Commission complaint brought under Title VII and asserts that "Recovery under Title VII is exclusively for lost wages, and there is no ground for excluding the payment of lost wages from income."
We hold for respondent.
Section 104(a)(2) focuses on amounts received through prosecution of a legal suit based on tort or tort-type rights or through a settlement agreement entered into in lieu of such prosecution. The right to the exclusion, in the case of an award by agreement, depends on the nature, and not on the validity, of the claim that is settled. Metzger v. Commissioner Dec. 43,832, 88 T.C. 834, 847 (1987), affd. without published opinion 845 F.2d 1013 (3d Cir. 1988); Church v. Commissioner Dec. 40,216, 80 T.C. 1104, 1107 (1983); Seay v. Commissioner Dec. 31,331, 58 T.C. 32, 36 (1972). An award of damages may be measured by wages lost and still represent an excludable award for personal injury. In determining the nature of the claim, therefore, we must take into account what could have been recovered through prosecution of the legal suit — in lieu of what was the award paid. Raytheon Production Corp. v. Commissioner 44-2 USTC ¶ 9424, 144 F.2d 110, 113 (1st Cir. 1944), affg. Dec. 13,108 1 T.C. 952 (1943). We also look to the language of the settlement agreement and, if it is not clear, to the "intent of the payor" in making the payment, gleaned from other evidence. Knuckles v. Commissioner 65-2 USTC ¶ 9629, ...
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