In Uncategorized on 11/01/2011 at 17:56

 Fair or Foul,  it’s Gross Income Anyway

So we learn from Glenn R. Crane and Deborah A. Crane, 2011 T.C. Mem. 256, filed 11/1/11.

This is a sad story. Deb’s son dies of cancer two days before Christmas. Deb gets cancer. Then Deb’s co-worker Amie claims their mutual boss sexually harassed her (and he didn’t even have the excuses that he was nominated for the Supreme Court or running for President). Deb steps up for Amie, claiming the boss is a chauvinist hog.

Deb gets demoted, her employee lease gets canceled putting her out of a job, and when she posts for a replacement job with the employee-lessor, doesn’t get it. Deb demands arbitration on her claim that all this was retaliation for backing Amie against Boss Hog, and gets awarded $44K, plus another $25K for counsel fees and arbitration costs.

The arbitrator finds Deb suffered no economic harm. There were economic reasons to cancel the lease, the job shift was to keep Deb away from Boss Hog, and Deb testified at the arbitration that she wasn’t going to take the pay cut that the replacement job offered.

Nevertheless, the arbitrator awards Deb the $79K, in a masterpiece of illogic:

“Notwithstanding my prior findings, I do find that Crane [Deb] suffered non-economic damages as the result of____’s [Boss Hog’s] direct actions and _______’s [Deb’s employer-lessee’s] failure to do more to control ____’s [Boss Hog’s] actions during the time the investigation into ____’s [Amie] sexual harassment complaint was pending. I find that ______ [Boss Hog] purposely acted in a way to intimidate Crane’s testimony in that investigation. I also find that given little or no communication by _______ [Deb’s employer-lessee] during the time the investigation was pending to Crane as to how she was, if at all, being protected from ____’s [Boss Hog’s] intimidation, ________ [Deb’s employer-lessee] acquiesced in ____’s [Boss Hog’s] actions. This is especially true since some of ____’s [Boss Hog’s] acts of intimidation were directly contrary to instructions he was given by his superior.” 2011 T.C. Mem.256, at p. 6.[Names omitted.]

So it would seem that the $79K was either for hurt feelings or punitive damages. The arbitrator said nothing about physical injury.

Deb and Glenn never reported the $79K on their joint 1040. Glenn claims Deb’s trial attorney told her it wasn’t taxable, and he wanted to disagree, but Deb was in so fragile an emotional state that he did nothing, and never told their accountant-preparer about the $79K or his qualms.

Section 104(a)(2) specifically excludes from gross income monies received on account of “personal physical injuries or physical sickness”. And money for emotional distress doesn’t get excluded, except to the extent there are actual medical expenses as a result.

Judge Chiechi: “…the record is devoid of evidence establishing petitioners’ contention that Ms. Crane ‘suffered from a physical sickness or illness because of her treatment in the workplace’. Nor does the record contain evidence establishing petitioners’ contentions that as a result of the negligent conduct of ______ [Deb’s employer-lessee] Ms. Crane suffered ‘emotional distress’ that manifested ‘itself in the form of [Ms. Crane’s] definite and objective physical injury.’ The record is also devoid of evidence establishing that Ms. Crane’s claim against ________[Deb’s employer-lessee] was for, or that the arbitrator’s award in his final arbitration decision was made on account of, personal physical injuries or physical sickness of Ms. Crane.” 2011 T.C. Mem. 256, at pp. 15-16 [Footnotes and names omitted.]

To the contrary, the arbitrator’s award was apparently made on account of the arbitrator’s annoyance at the way Deb’s employer-lessee handled the investigation into Amie’s complaint, as same related to Deb.

Tax Court also finds that the entire $79K must be included in Deb and Glenn’s gross income, although they may have a deduction for their legal fees and arbitration costs, but leaves that to the Rule 155 horse-trade that will follow this decision.

Finally, Glenn’s qualms about the exclusion of the $79K despite trial counsel’s assurances, plus the fact that there’s no evidence what Deb told trial counsel to elicit the statement that the award wasn’t taxable; and finally, the fact Glenn never told his accountant-preparer about the $79K so as to get a second opinion, means that the Section 6662 accuracy penalty is sustained.

Takeaway–No hurt may be foul or no foul, but there’s income tax to pay.


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