In Uncategorized on 12/05/2011 at 20:49

Or, A Little Learning Is a Dangerous Thing

Once again I quote Alexander Pope, as I did in my blogpost “A Dangerous Thing”, 4/13/11:

A little learning is a dangerous thing;
Drink deep, or taste not the Pierian spring:
There shallow draughts intoxicate the brain,
And drinking largely sobers us again.

This was advice an unnamed Missouri law firm should have heeded, but their failure to read and heed bails out DeeDee Dennis, in Denise Diana Dennis, 2011 T. C. Sum. Op. 134, filed 12/5/11.

Echoes of poor ol’ Debbie Crane (see my blogpost “No Hurt, No Foul?”, 11/1/11). DeeDee wins a discrimination suit (race this time, not sex), claiming damages for “loss of self-esteem, humiliation, emotional distress and mental anguish and pain, and related compensatory damages.” 2011 T.C. Sum. Op. 134, at pp. 2-3.

What’s wrong with this picture? No physical injury or illness.

Now for the kicker. Judge Wells takes up the story:  “…petitioner signed a document from her attorneys titled ‘Settlement Distribution – Tax Consequences’, which stated, among other things:

“‘Counsel has informed client that there are complicated issues surrounding the taxability of employment discrimination awards and/or settlements. Counsel has further informed Client [sic] that payment for non-physical injuries are generally taxable * * *.


“‘Counsel informed Client [sic] that the law is unsettled as to whether emotional damages in non-physical injury cases are taxable. Counsel informed client about the decision in Murphy v. Internal Revenue Service 460 F.3d 79 (2006) holding that such damages are not always taxable. Counsel has urged client to obtain professional tax advice and provide a copy of the attached case to the tax professional to determine what, if any, impact it has on the resolution of the issue of the tax consequences associated with this settlement. Counsel has informed Client [sic] that there has been an appeal of that case and the case may be overturned and/or may not be followed by the Courts in Missouri * * *’.

“The case mentioned in that document, Murphy v. IRS, 460 F.3d 79 (D.C. Cir. 2006), was later vacated by the Court of Appeals for the District of Columbia Circuit on December 22, 2006, Murphy v. IRS, 99 AFTR 2d 2007-396, 2007-1 USTC par. 50,228 (D.C. Cir. 2006). The Court of Appeals subsequently heard additional arguments before issuing another decision on July 3, 2007, in which it held that the taxpayer’s compensatory award for emotional distress was taxable. Murphy v. IRS, 493 F.3d 170 (D.C. Cir. 2007). However, petitioner was not aware of those developments.” 2011 T.C. Sum. Op. 134, at pp. 3-4.

DeeDee and her lawyers were both unaware that Murphy’s Law had trumped the Murphy case. If anything could go wrong, it did.

DeeDee went to a franchise tax preparer when she got the 1099-MISC showing her recovery in the lawsuit. The franchisee didn’t have a clue whether the award was or was not taxable, although Section 104(a)(2) had not changed. DeeDee, disappointed at the clueless franchisee, went to another preparer, whose address she did recall but whose name she did not, obtained that preparer’s oral opinion that the award was not taxable, and rewarded that preparer by taking her business to still another preparer. She never showed that preparer the 1099-MISC (DeeDee said she had lost it), said the settlement was confidential, and the preparer, taking her at her word (serious mistake), never put the settlement income on DeeDee’s return.

IRS wants the Section 6662(a) accuracy penalty.

Judge Wells again: “Petitioner is obviously unfamiliar with tax law. She was advised by the attorneys who handled her lawsuit that she should seek professional advice regarding the tax treatment of her income from the settlement. By advising her of the Court of Appeals’ holding in Murphy v. IRS, 460 F.3d 79 (D.C. Cir. 2006), those attorneys also provided her with a reason to believe that the income from the settlement might not be taxable. Petitioner consulted three different tax preparation services, and none of them advised her that the income from the settlement was taxable. On the basis of petitioner’s background, education, and actions seeking advice on a complex tax issue, we conclude that petitioner had reasonable cause for her position and acted in good faith on her belief, although mistaken, when she failed to report her income from the settlement.” 2011 T.C. Sum. Op. 134, at pp 9-10.

Judge Wells finds that the tax advice her attorneys gave was erroneous when given, as Murphy I had already been overturned by the time they wrote their disclaimer.

As with Debbie Crane, litigators–don’t give tax advice unless you know what you’re talking about. Drink deep, guys and gals. Or leave the stuff alone.

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