Pettit v. Comm'r

MEMORANDUM FINDINGS OF FACT AND OPINION

VASQUEZ, Judge: Respondent determined a $ 20,300 deficiency in and a $ 4,060 section 6662(a) penalty on petitioners' 2003 Federal income tax. ¹ The issues for decision are (1) whether $ 75,749 petitioner Michael A. Pettit received in connection with the settlement of a lawsuit is excludable from gross income for 2003 pursuant to section 104(a)(2), and (2) whether petitioners are liable for the section 6662(a) penalty for 2003.

FINDINGS OF FACT

None of the facts, but all of the exhibits, have been stipulated, and the exhibits are incorporated herein by this reference. At the time the petition was filed, petitioners resided in Michigan.

Before March 5, 2002, Michael A. Pettit (petitioner) was employed by Electronic Data Systems Corp. (EDS) as a facilities project coordinator. On March 5, 2002, EDS terminated petitioner as part of a workforce reduction. Petitioner's supervisor at EDS informed petitioner that he was selected *89 for termination on the basis of his age and pay. At the time of his termination, petitioner was approximately 47 years old. EDS replaced petitioner with a facilities project coordinator who was younger than petitioner.

Petitioner filed an age discrimination lawsuit, pursuant to Michigan law, against EDS. The case eventually went to trial in the U.S. District Court for the Eastern District of Michigan (lawsuit). In the lawsuit, petitioner set forth a claim alleging physical injuries, emotional distress, and family problems arising out of his termination from EDS.

The lawsuit went to trial in September 2003. However, after 3-1/2 days of trial, the parties settled the case by executing a "Settlement Agreement and Release" (settlement agreement). The settlement agreement provided that petitioner "presented evidence of serious emotional distress during trial" of the lawsuit. Pursuant to the settlement agreement, EDS agreed to pay petitioner $ 240,000. EDS paid petitioner $ 120,000 in 2003 ($ 120,000 payment). The settlement agreement provides that the $ 120,000 payment

is to be apportioned as follows: Of the first payment of One Hundred Twenty Thousand Dollars ($ 120,000), Forty Four Thousand *90 Two Hundred and Fifty Dollars and sixteen [sic] ($ 44,250.12) shall be attributed to lost wages and shall be tendered in a check which will be issued as a payroll check with applicable withholding on which an IRS Form W-2 will be issued; the remaining Seventy Five Thousand Seven Hundred and Forty Nine Dollars and Eighty Eight cents ($ 75,749.88) of the first payment and the entire second payment of One Hundred and Twenty Thousand Dollars ($ 120,000.00) shall be attributed to emotional distress, pain & suffering and other non-wage damages and an IRS Form 1099 shall be issued.Petitioner's annual salary at EDS was $ 59,000. In the settlement agreement, petitioner and EDS agreed to, and calculated, the allocation of $ 44,250.12 to lost wages to reflect the amount of salary petitioner would have earned if he had not been terminated and had remained employed with EDS until December 31, 2002.

In return for the money EDS paid petitioner pursuant to the settlement agreement, petitioner agreed to the following:

SECOND: Complete Release and Dismissal of Lawsuit (With Prejudice).

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In return for the consideration set forth above, Pettit agrees to release EDS * * * from all claims or demands *91 Pettit may have against EDS, including, but not limited to, any claims related to Pettit's employment with EDS or separation from that employment and any claims for attorneys fees and costs. This includes, without limitation, a release of any rights or claims asserted by Pettit in the lawsuit styled Pettit v. Electronic Data Systems, Inc., Case No. 02-CV-74357, which is currently pending before the United States District Court for the Eastern District of Michigan, Southern Division. * * * This release also includes, without limitation, a release by Pettit of any related or unrelated wrongful discharge claims, contractual claims, tort claims or any other actions. This release covers both claims that Pettit knows about and those he may not know about.

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FOURTH: No Future Lawsuits.

Pettit promises never to file a lawsuit, demand, action or otherwise assert any claims that are released in the Second Paragraph of this Agreement * * *.

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THIRTEENTH: Entire Agreement

For the purpose of implementing a full and complete release and discharge of claims, Pettit expressly acknowledges this Agreement is intended to include in its effect, without limitation, all the claims described in the *92 preceding paragraphs, whether known or unknown, suspected or unsuspected, and that this Agreement contemplates the extinction of all such claims, including claims for attorneys' fees. Pettit expressly waives any right to assert after the execution of this Agreement that any such claim, demand, obligation, or cause of action has, through ignorance, oversight, or for any other reason, been omitted from the scope of this Agreement.

This is the entire agreement between Pettit and EDS, and supersedes and prevails over all other prior agreements, understandings or representations by or between the parties, whether oral or written. This Agreement may not be modified or amended, and there shall be no waiver of its provisions, except by a written instrument executed by Pettit and a corporate officer of EDS. EDS has made no promises to Pettit other than those in this Agreement.

The accounting firm of Belger and Associates prepared petitioners' 2003 joint Federal income tax return. On petitioners' timely filed 2003 return, petitioners reported $ 44,250 of the $ 120,000 payment as wages. Petitioners did not include $ 75,750 of the $ 120,000 payment as other income. Instead, on "Statement 1 -- Form *93 1040, Line 21 -- Other Income", petitioners calculated their other income as follows:

The disclosure on their 2003 return reflected petitioners' understanding that the $ 75,750 of the $ 120,000 payment was not taxable (i.e., it was excludable under section 104).

Respondent determined that the amount of petitioners' other income on their 2003 return should be increased by $ 75,749 because this amount was not excludable from income. ² Respondent also determined a section 6662 penalty for 2003.

OPINION

Generally, the taxpayer bears the burden of proving the Commissioner's deficiency determinations incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115, 54 S. Ct. 8, 78 L. Ed. 212, 1933-2 C.B. 112 (1933). Petitioners have neither claimed nor shown that they satisfied the requirements of section 7491(a) to shift the burden of proof to respondent. Accordingly, petitioners bear the burden *94 of proof. See Rule 142(a).

It is well established that, pursuant to section 61(a), gross income includes all income from whatever source derived unless otherwise excluded by the Internal Revenue Code. See Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429-431, 75 S. Ct. 473, 99 L. Ed. 483, 1955-1 C.B. 207 (1955). Exclusions from gross income are construed narrowly. Commissioner v. Schleier, 515 U.S. 323, 327-328, 115 S. Ct. 2159, 132 L. Ed. 2d 294 (1995).

The Small Business Job Protection Act of 1996 (SBJPA), Pub. L. 104-188, sec. 1605, 110 Stat. 1838, amended section 104, as relevant here, to provide:

SEC. 104. COMPENSATION FOR INJURIES OR SICKNESS.

(a) In General. -- Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include --

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