In Uncategorized on 07/01/2020 at 18:23

It’s another reprise of Sam’s Club. That’s Sam’l T. Coleridge, and his “greybeard loon,” the one with the albatross. But today Judge Wells has this small-claimer, Dorothea E. Beckett, 2020 T. C. Sum. Op. 19, filed 7/1/20, that’s a natural for Sam.

Dorothea’s pro se in this fight over the $19K IRS claims she didn’t report but should have, after she settled her ADA claim. But though now pro se, on the litigation with her employer she was well-served by her trusty attorney Thomas B. Corbin, Esq.

Dorothea has seizures. “She would hit her head hard enough to require stitches or would bite her tongue, and at least once she was sent to the emergency room.” 2020 T. C. Memo. 19, at p. 2. I cite these physical details to show that, when trusty attorney Tom sued her employer for failing to make reasonable accommodation, he made sure the stip of settlement included “pain and suffering, physical distress,” as well as emotional injury, in what was settled. 2020 T. C. Sum. Op. 19, at p. 3.

Dorothea was less well-served by the trial judge (whether State courtier or Federale not stated; concurrent jurisdiction, y’know). “Petitioner asked the judge presiding over her lawsuit whether the $19,000 was taxable and was told that it was not taxable because the lawsuit was based on her seizures.” 2020 T. C. Memo. 19, at p. 4. Well, Judge, the right answer is the one Judge Wells gives: yes and no.

The problem is that most trial judges have to deal with a plethora of issues in any but the simplest cases. And taxes impinge on the vast majority of even the simple ones. A fender-bender in Village Court, that settles over the Judge’s coffeetable in her livingroom, has tax implications.

Beware, litigant, of free advice from the bench. The learned judge may know a lot; none I’ve ever encountered knows everything.

Now of course there’s the calculus of what the parties actually settled, not what they said they settled. If I’m counsel for a settling defendant, I want to make sure my client can write off the costs of the settlement; the plaintiff is on his, her, its or their own.

Here, Dorothea’s real physical injuries carry the day. At least part of the day.

“The $19,000 payment in issue was made ‘for claims of emotional distress, pain and suffering, physical distress and damages’. Petitioner’s complaint alleged violations of the ADA, which is not a worker’s compensation statute. We find that the $19,000 settlement payment clearly meets the definition for damages because petitioner received an amount through a settlement agreement entered into in lieu of a legal suit or action.” 2020 T. C. Sum. Op. 19, at pp. 7-8. (Citation omitted).

OK, but is “physical distress” enough?

It is in Judge Wells’ court…sort of.

“Petitioner’s suit began as a discrimination suit. Damages received as the result of a wrongful termination of employment claim are generally not received on account of personal physical injuries or physical sickness. There was, however, a physical component to petitioner’s complaint. The settlement agreement explicitly states that the compensatory damages were paid in part for ‘physical distress and damages’. These terms are evidence that the payor, petitioner’s former employer, intended a portion of the $19,000 to compensate petitioner for her physical injuries. This is supported by the observation of the judge presiding over petitioner’s ADA claim, that petitioner’s seizures were an actual basis for the settlement. Petitioner credibly testified that she suffered head and other physical injuries directly caused by her employer’s refusal to make reasonable accommodations. This sets petitioner’s case apart from the myriad of cases in which we have held that taxpayers’ settlement payments for wrongful termination claims are not excludable from income under section 104(a)(2).” 2020 T. C. Sum. Op. 9, at p. 9. (Citations omitted).

OK, but other claims were settled as well. And here Judge Wells gives a useful hint for drafting settlement agreements.

“The agreement in the instant case explicitly allocates the settlement amount among backpay, attorney’s fees, and compensatory damages. Petitioner’s settlement agreement further identifies three bases for the $19,000 settlement payment: ’emotional distress’, ‘pain and suffering’, and ‘physical distress and damages’. We have no reason to believe that this express allocation was not the result of adversarial, arm’s-length, and good-faith negotiations, or that it is incongruous with the ‘economic realities’ of petitioner’s underlying claims. Accordingly, we conclude that one third of petitioner’s $19,000 settlement payment is excluded from income under section 104(a)(2).” 2020 T. C. Sum. Op. 19, at p. 11.

So Judge Wells “stoppeth one of three.”

I understand plaintiffs’ counsel will want to go for a better allocation to physicals if at all possible. But watch out for “incongruous with the economic realities” landmine, and have your local jury verdict comparables handy.

Likewise, this is, after all, a small-claimer. Maybe Judge Wells was a little more generous than he might be in a T. C. Memo., with bigger bucks on the table and IRS’ appeals counsel heading for the USCCA website to set up the appeal.

But it’s your case and your call. Me, I’d go for it.







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