In Uncategorized on 12/23/2013 at 17:54

No, not Charlie Dickens’ done-to-death classic, but rather another of my unending causeries on tactics and strategies for Tax Court, herein in three staves (or takeaways).

Now I know that the easiest position to play is Monday morning quarterback; and remember, there but for the grace of you-know-Whom goes any of us.

Case in point, Linda Sharp, 2013 T. C. Memo. 290, filed 12/23/13. It’s another Section 104 settled-for-personal-injuries-on-the-job case. Personal, not physical.

Takeaway the First: Even if you denominate the settlement as entirely for mental, and not physical, injuries, if you have any medical expenses that you can tie to the mental, put them in evidence. “Damages not in excess of the amount a taxpayer pays for medical care for emotional distress are generally excludable from gross income. Sec. 104(a)(2) (flush language); sec. 1.104-1(c), Income Tax Regs. Petitioner failed to make this argument at trial or on brief and offered no evidence as to the amount she paid for medical care costs for her emotional distress. Accordingly, we find that none of the settlement award is excludable under this theory.” 2013 T. C. Memo. 290, at p. 11, footnote 10.

Takeaway the Second: Make a Workers’ Comp claim and follow it up. Make sure your settlement documents reflect you’re settling a Comp claim against the former employer. “Amounts that a taxpayer receives as compensation for personal injuries under a statute in the nature of a workmen’s compensation act may be excluded from gross income. See sec. 104(a)(1); sec. 1.104-1(b), Income Tax Regs.” 2013 T. C. Memo. 290, at p. 6.

Here, Linda’s attorney blows it: “The settlement agreement does not indicate that the parties intended petitioner to receive the settlement proceeds in exchange for her settling a claim under the IWCA [Iowa Workers’ Compensation Act]. The sole arguable reference to a workers’ compensation claim is lodged in the seventh and final term of the agreement and conditions the agreement on petitioner’s settling her ‘W.C. claim.’ This sole vague reference is insufficient to prove that the university paid petitioner the settlement proceeds in exchange for her settling a claim under the IWCA.” 2013 T. C. Memo. 290, at p. 8.

It gets worse: “Moreover, petitioner failed to offer any documents relating to her claims under the IWCA. This failure is particularly curious, given petitioner is currently being represented by her workers’ compensation attorney, who seemingly would have unfettered access to these documents. We remind petitioner that the burden of proof is on her.” 2013 T.C. Memo. 290, at p. 9, footnote 7.

Yes, I know, Constant Readers, that Tax Court looks at what the parties actually settled, not what they said they settled. I read my own blogposts; see “An Unsettling Settlement”, 10/3/11. But at least give the Judge a peg on which to hang a favorable conclusion: a longshot is better than no shot. If there’s a Comp claim, have the settlement refer to the claim in extenso, and put in all the documents on the trial.

Takeaway the Third. Although Linda is denied her exclusion, she had a shot at the Section 6664(c)(1) good-faith reliance on her attorney to avoid the 20% understatement chop. Judge Kroupa says all Linda offered was her own unsubstantiated testimony about what she told her lawyer. But Judge Kroupa ruled out her attorney’s testimony in yet another footnote.

“Petitioner could not offer the testimony of the attorney who had represented her in her workers’ compensation case and who had advised her that she could exclude the settlement proceeds from gross income because the same attorney represented her at trial before this Court.” 2013 T. C. Memo. 290, at p. 4, footnote 4.

Excuse me, Judge, but we get our ethical rules in Tax Court from the ABA Model Rules of Professional Conduct. See Rule 202(a)(3).

And the 2013 Edition of said Model Rules provides as follows, in pertinent part, as the high-priced lawyers say: “Rule 3.7 Lawyer As Witness

“A lawyer shall not act as advocate at a trial in which the lawyer is likely to be a necessary witness unless: (3) disqualification of the lawyer would work substantial hardship on the client.”

Wouldn’t precluding her attorney as a witness “work substantial hardship on the client”? Her lawyer was the sole party who could provide the evidence to corroborate her statements, there is no jury, which could be misled, in a Tax Court trial, and Judge Kroupa is certainly able to assess credibility without being overawed by the advocates who appear before her. Remember Judge Vasquez in Donald R. Fitch and Brenda T. Fitch, 2012 T. C. Memo. 358, at p. 12: “See Diaz v. Commissioner, 58 T.C. 560, 564 (1972) (stating that the process of distilling truth from the testimony of witnesses, whose demeanor we observe and whose credibility we evaluate, is the daily grist of judicial life).” And see my blogpost “Practicing Accountancy Can Be Hazardous To Your Health”, 12/6/12.

So why didn’t Linda’s lawyer object? Or if s/he did, I hope s/he can appeal.

  1. The law works in “funny” ways, but always against the client. Once again, Justice is Deaf and Dumb as well as Blind.


  2. As I said, the easiest position in football is Monday morning quarterback. So easy to be wise after the fact.


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