Threlkeld v. C.I.R., Nos. 87-1511

• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)
• Writing for the Court: Before MERRITT and KENNEDY, Circuit Judges, and CONTIE; CONTIE
• Citation: 848 F.2d 81
• Docket Number: Nos. 87-1511,87-1592
• Decision Date: 01 June 1988
• Parties: -1285, 56 USLW 2716, 88-1 USTC P 9370 James E. THRELKELD, Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.

Page 81

848 F.2d 81 61 A.F.T.R.2d 88-1285, 56 USLW 2716, 88-1
USTC P 9370 James E. THRELKELD, Petitioner-Appellee,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant. Nos. 87-1511, 87-1592. United States Court of Appeals,
Sixth Circuit. Argued April 25, 1988.
Decided June 1, 1988.

Gary R. Allen and Michael Paup, Chief Appellate Section, Tax Div. Dept. of Justice, Bruce R. Ellisen (argued), Michael C. Durney, Ann Durney, William F. Nelson, Chief Counsel, I.R.S., Washington, D.C., for respondent-appellant.

G. Keith Rogers, Jr. (argued), James E. Threlkeld, Threlkeld, Howard, McPherson & Rogers and Walt, Dyer & James, Memphis, Tenn., for petitioner-appellee.

Before MERRITT and KENNEDY, Circuit Judges, and CONTIE, Senior Circuit Judge.

CONTIE, Senior Circuit Judge.

The Commissioner of Internal Revenue (Commissioner) appeals from the February 25, 1987 and March 20, 1987 decisions of the United States Tax Court. For the following reasons, we affirm the Tax Court's judgments.

I.

On May 10, 1979, taxpayer James Threlkeld filed a diversity action against J.B. Williams in the United States District Court for the Western District of Tennessee, alleging malicious prosecution. Williams had contracted to purchase some real estate from taxpayer and another, and then initiated and subsequently lost chancery court proceedings in an attempt to rescind the contract.

In his complaint, Threlkeld alleged that Williams "instituted, continued, and prosecuted his claims" in the chancery suit "without probable cause and with malice." Taxpayer also alleged that Williams' actions in bringing the chancery court suit caused various injuries described as follows:

Plaintiff was subjected to indignity, humiliation, inconvenience, and pain and distress of mind, was prevented from attending to his usual professional pursuits, incurred expenses and costs in defending defendant's claims in and pertaining to the chancery suit, suffered injury to his professional reputation, and suffered injury to his credit reputation.

Additionally, taxpayer filed two other suits against Williams and others which alleged that certain fraudulent conveyances of property were made in an effort to insulate those properties from taxpayer's original chancery court judgment.

Page 82

On December 8, 1980, Threlkeld settled his malicious prosecution suit. Taxpayer agreed to release all other pending claims and to assign the original chancery court judgment. In consideration of settlement of his claims, taxpayer received $300,000 allocated as follows:

$75,000

For the release of taxpayer's claims against J.B. Williams asserted in the malicious prosecution action for damage to his professional reputation.

$75,000

For the release of taxpayer's claims against J.B. Williams asserted in the malicious prosecution action for damage to his credit reputation.

$74,980

For the release of taxpayer's claims against J.B. Williams asserted in the malicious prosecution action for indignity, humiliation, inconvenience, and pain and distress of mind.

$20

For the release of taxpayer's claims against J.B. Williams and others asserted in the fraudulent conveyance actions.

$75,000

For the assignment of the judgment by taxpayer.

Threlkeld received $86,000 of the total settlement in 1980 and $214,000 in 1981. $21,500 of the amount received in 1980 and $53,500 of the amount received in 1981 represented settlement for damages to taxpayer's professional reputation.

Threlkeld excluded most of the settlement from gross income on his 1980 tax return. The Commissioner assessed a deficiency, and taxpayer petitioned the Tax Court seeking a redetermination of the deficiency. The Commissioner subsequently conceded that all of the amount at issue except the $21,500 attributable to damages for injury to taxpayer's professional reputation was excludable under I.R.C. Sec. 104(a)(2) which 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." Therefore, the only issue before the Tax Court was whether the $21,500 attributable to damages for injury to taxpayer's professional reputation was likewise excludable.

Threlkeld followed the same procedure when filing his 1981 tax return. Again, the Commissioner assessed a deficiency, and taxpayer petitioned the Tax Court seeking a redetermination of the deficiency. The parties agreed to be bound by the Tax Court's decision regarding taxpayer's 1980 tax return.

On December 8, 1986, the Tax Court with one judge dissenting filed an opinion which held that...