Forest v. IRS, 1st Cir. (1996)
Forest v. IRS, 1st Cir. (1996)
Forest v. IRS, 1st Cir. (1996)
No. 95-2180
LAUREL A. FOREST,
Petitioner,
v.
Respondent.
____________________
____________________
Before
_____________________
Charles
_______
with
whom
Loretta C.
Argrett,
_____________________
Department of Justice,
____________________
Petitioner-Appellant Laurel A.
Forest ("Taxpayer")
appeals the
found by
and
Memo. 1995-377.
In the
spotlight is Section
received . . . on
excluded
from
Commissioner's
Taxpayer
should be
income.1
determination that
received in
settlement
injuries or sickness"
The
Tax
a portion
of her
Court
of the
we affirm.
We
upheld
be
the
$2,000,000
personal injury
gross income.
the
account of personal
gross
104(a)(2) of
claim
and included in
that decision.
do not reach,
For
because
they
have
interest
been
in a
waived, issues
settlement of
concerning
a tort action
whether prejudgment
is excludable
as a
BACKGROUND
BACKGROUND
and incorporated
slipped
and fell
inside
her
employer's walk-in
manufacturer
of the
refrigerator,
when she
refrigerator.
Bohn Refrigeration
Products
____________________
-2-
("Bohn"), in the
Superior Court,
returned
Civil
Providence, Sc.).
a verdict on September
Action
No.
See Forest v.
___ ______
85-0666
Following a trial,
18, 1991, in
(R.I.
the jury
favor of Taxpayer
total award
of $2,340,000.
In
addition, pursuant
to Rhode
interest of
twelve percent
was added
to the
jury award.
The
The interest
On
trial.
On October
Superior
Court
conscience"
and
15, following a
found
that
ordered a
the
filed a motion
hearing on the
jury's
new trial
on
award
for a new
motion, the
"shocked
the issue
the
of damages
filed
Two
consented to
and
judgment for
in the amount
of $1,440,000
interest
and costs.
percent was
added to
Statutory
prejudgment interest
of twelve
time in the
amount of
$1,641,600, resulting in
53% of
October
30,
1991,
Bohn, not
satisfied
with
the
Then,
on
new result,
-3-
Again,
During
the pendency
of the
appeal, Bohn
Release
("Release")
did
between
the
allocated
proceeds
Taxpayer
of all
to pay Taxpayer
any allocation
claims
for
$2,000,000.
of the
personal
The
Release
settlement proceeds
settlement
whether
by
settled the
any
negotiations,
portion
to interest
represented
of
the
the
settlement
nor stated
interest
parties
neither
proceeds
that none
--
was
discussed
should
of the
interest
During
be
settlement
simply
not
of
the General
Release, Aetna
Casualty issued
the terms
a check
in the
amount
On December
23, 1991, Bohn withdrew its appeal and the parties entered into a
Satisfaction
for
Stipulation ("Stipulation")
docket.
in the
Superior Court
The
judgment
October
17,
entered by
1991[,]
this
in the
Court on
amount
of
costs, has
The
parties
did
Stipulation.
not
The
consider
Clerk of
the
the
tax
consequences
Superior
Court
of
the
did not
add
During
Taxpayer in
1992, Taxpayer's
attorneys issued
check to
-4-
and
costs.
Taxpayer
$2,000,000 settlement on
neither
reported
any
portion
of
the
claimed any deductions for legal fees and costs stemming from the
lawsuit.
There was
received
Casualty.
Form 1099
documenting
interest
income from
Aetna
In
its February
Commissioner determined
for
the
taxable year
Commissioner
determined
3,
1994, notice
of deficiency,
a deficiency in Taxpayer's
1992
in the
that
of
deficiency
Taxpayer's
failure to
additional
$560,000.
This
settlement
Section
in her
figure represented
proceeds
($1,440,000).
included
the
amount
($2,000,000)
1992
gross income
$137,459.
was
The
based
upon
gross income
the
the
in the amount of
the difference
and
the
between the
damage
award
the 2% floor
provided by Section
the amount
of $175,513 for
to the
in settlement
law
and
that
the
entire
lump
sum
excludable from
sustained
Commissioner's
the
received
was
therefore
104(a)(2).
The
Tax Court
holding
that
determination,
-5-
portion
of
the
settlement
proceeds
represented
prejudgment
[I]n
the
instant
allocations
[R]elease
were
as to
case,
made in
no
express
the [G]eneral
interest.
Indeed, the
allocations,
we
evidence in the
must
no express
look
to
other
are to be
allocated to interest.
and circumstances of
we hold that
on the facts
[Taxpayer]
of a $2,000,000
annum
over
9.5
years
is
Nevertheless, in
light
of the
Taxpayer is
forth
in the notice of
Commissioner's
$1,065,420.56"
(footnote
Commissioner's
a deficiency
determination in
the notice
of 12% per
omitted).
concession
in excess of
portion
that
that set
of
deficiency that
This appeal
26 U.S.C.
ensued.
We have
jurisdiction pursuant to
7482(a)(1).
STANDARD OF REVIEW
STANDARD OF REVIEW
-6-
and to the
civil
same extent
actions tried
Whether
law and,
as decisions of
without
a jury."
26 U.S.C.
in
7482(a).
is purely a question of
manner
See
___
Brabson v.
_______
(Coffin, J.,
sitting by
Cir.
Alexander v.
_________
1995) (collecting
cases);
IRS, 72 F.3d
___
see also
________
64 U.S.L.W.
938, 941
(1st
of
law
and
principles to
fact
of
ultimate
fact
derived
subsidiary facts).
-- including its
various elements
error.
The
allocation of the
of recovery
-- is
from
court's findings
applying
legal
of
settlement proceeds to
reviewable
only for
clear
DISCUSSION
DISCUSSION
Neither
party
disputes
that
the
claim
underlying
suffered injuries.
we must determine,
in
settlement of
Taxpayer's personal
prejudgment interest
"damages received . .
and,
if so,
injury claim
whether it
. on account of personal
I
I
-7-
constitutes
is excludable
as
injuries" within
As always, we begin
as otherwise
income
two.
provided in this
1.104-1(c).
and
predecessors
its
As
v. Schleier,
________
has
been repeatedly
gain constitutes
it falls
gross income
within a
26 U.S.C.
that
C.F.R.
that, "[e]xcept
means all
61(a); see 26
___
of this section
emphasized
by
the
unless the
specific
(1995)), "any
taxpayer demonstrates
exemption."
Id.
___
In
turn,
Section
relevant
lump
sums
injuries
or
as
periodic
or sickness."
26
payments)
U.S.C.
on account
104(a)(2).
of
As
personal
the Tenth
of
61(a)'s broad
interpretation that
exclusions
construed.'"
from
income
must
be
narrowly
Id.
___
(quoting Schleier, ___ U.S. at ___, 115 S. Ct. at 2163); see also
________
________
II
II
contentions on appeal.
First,
she claims that the settlement amount did not contain prejudgment
interest,
but
consisted
Section 104(a)(2).
Second,
solely
of
damages, excludable
under
-8-
is considered
to prejudgment
interest is
excludable under
amount attributable
Section 104(a)(2).
-9-
A.
A.
"It is
burden of
99
F.3d at 23.
The Commissioner's
proving it to
(1933).
subject
be wrong."
"Ultimately, of
to
reversal
Welch v. Helvering,
_____
_________
the
taxpayer
the burden of
if
Delaney,
_______
assessment is
establishes
by
preponderance of the
erroneous."
Delaney,
_______
99 F.3d at 23.
Taxpayer
to
of
the settlement.
While this
suggests
no
argument
may have
certain
differentiation
between
damages
and
prejudgment
ignores
the
guiding
principle
that
"the
required
inquiry
parties,
whether
stipulation
of
in
the
dismissal,
settlement
or both,
agreement
because
proper,
the
under established
precedent
damages
the Tax
awarded'
determination, "the
whether a
Court must
or
paid."
intent of
determine 'in
Id.
___
at 23-24.
the payor
is
lieu of
what were
In
making this
a key
determinant
Id. at 24.
___
-10-
the Tax
Court looks to
circumstances surrounding
in the
payee's
underlying proceeding,
complaint
proceeding, and
by each party
and
amended
complaint
there."
in
the
underlying
Robinson v. Commissioner,
________
____________
in the
(1996).
102 T.C.
F.3d 34
116
(5th Cir.
Furthermore,
as we
provides 'the
best indication
70 F.3d at 38).
of the
worth' of
the taxpayers'
Here, the
silence
any,
evidence before
beyond
the
language of
circumstances
considered
it indicating
surrounding
evidence
consequences of
the
judgment2
Release
Taxpayer's
The
attorneys
facts and
Tax
that
Court
the
tax
was
provided
intent, looked
to the
settlement.
settlement
that
that
from
settlement negotiations.
that
the General
the payor's
negotiated
under
prejudgment
the
interest,
shadow
in
the
of
same
____________________
Taxpayer argues that the jury award was not a final verdict or
decision
that
Taxpayer contends
award.
Even
of an interest
if Taxpayer correctly
-11-
percentage
of
remittitur.3
the
total
award
both
before
and
after
the
judgment .
. . in
the amount of
$1,440,000, plus
costs, has
interest and
that award
support
included
the
Tax
Court's
prejudgment
circumstances
finding that
interest,
supports the
the
nothing
in
circumstances
settlement
those
opposite conclusion.
amount
facts
At
and
best, the
____________________
recites the law of Rhode Island, which we need not decide, we are
not
looking
to
the judgment
as
the
sole
indication of
this settlement.
the
Instead,
Taxpayer
jury
award.
v. McKenna, 215
_______
Dawes,
_____
it
allows only
appeal.
Id. at 325-26.
___
the
Court
Tax
to
Thus,
look
award is
open for
review on
to the
award
after
remittitur
as a
Furthermore, as
if
the
the
Tax
for personal
Court found
proceeds
was
proceeds
represented less
injuries.
that
attributable to
portion
interest
than twenty
damage award.
-12-
In Robinson,
________
even
of the
102 T.C.
settlement
though the
percent of
total
the original
General
Release's
settlement
and
silence
regarding
proceeds is ambiguous.
circumstances
conclusion,
weighing
in
the
allocation
In light of
favor
of
of
the
the
Tax
Court's
v.
cases
involve
thereafter the
jury
two cases
McShane
award,
decision and
an
diverge.
appeal,
and
In McShane,
_______
settlement,
the settlement
to the one at
found that
the Tax
In a
the
Court's determination
_______
that
the
settlement did
not include
interest
was based
on a
"First,
the
interest'
term
had
'without
been
included
costs
and
in
the
for
the principal
all
action,
Second,
defendant in
the intentions
parties to
the
as
by their
stated
underlying tort
attorneys,
interest.
Third,
tort
action
amounts
for
arrived
at
that
each
by
the Tax
of all counsel in
the
plaintiff
assessing the
Court
settlement
had
been
risks
on
consequences had
The Tax
Court in
the instant
case
made a
similarly
It
-13-
from the
interest
settlement amount.
It
The court
_______
not to
language indicating
settlement satisfied
after remittitur,
that the
including interest
and costs.
the judgment
We
find that
the
facts
and
circumstances
surrounding
the
settlement
and
Taxpayer's arguments
her burden of
B.
B.
Whether
Whether
prejudgment
prejudgment
interest
interest
is
is
1.
Kovacs v. Commissioner
excludable
excludable
as
as
1.
Kovacs v. Commissioner
______
____________
v.
Commissioner,
____________
100
T.C.
124
(1993),
aff'd,
_____
Kovacs
______
25 F.3d 1048
(6th Cir.), cert. denied, 115 S. Ct. 424 (1994), that prejudgment
____________
Kovacs improperly
______
interest is
maintains
that nothing
in
interest income.
the legislative
-14-
She
further
history of
Section
Finally, relying
Taxpayer argues
period
settlement payments
representing the
-- which would
find
nothing
in
include a component
the
record
below,
and meant
to be excludable.
including
the
As we
testimony
initial and
we
reply briefs of
time on appeal.
taxpayer's
the parties,
See
___
Delaney, 99 F.3d
_______
failure to raise
a similar
to
at 26 (determining
argument before
that
the Tax
2.
2.
Taxpayer contends
determined by
reference to the
nature of the
underlying claim.
personal injury
and, as such,
is taxable is
one to redress
thereon are
____________________
We note, in passing,
rely on this
amendment, such
reliance is misplaced.
That
Act
allows
the
excludability
of
the
statutory language
33,
the
amount
Taxpayer, as her
provisions
of
of that
income.
This
settlement does
Act.
We apply
periodic
fall within
the Tax
to be
entire
claim.
the
As
of settlement we
-15-
excludable.
determined under
the relevant
nature of the
underlying claim is
argues that,
under
Rhode
Island
considered part of
law,
statutorily
imposed
interest
is
We
recently
characterization
"thoughtful"
of
visited
interest.
the
In
approach utilized
question
Delaney, we
_______
in Brabson,
_______
of
looked
73 F.3d
"The
Tenth
though
Circuit
state law
. .
governs the
Accordingly,
noted
that
nature of
created under
tax consequences
interests and
rights
of federal law.' . .
the Brabson
_______
panel first
statutory prejudgment
state
interest under
law
to the
1040 (10th
to
federal
law
to
determine
its
excludability."
Accordingly,
we
look first
Rhode
Island law
the legal
relies on
part
Mutual
______
of damages.
court
component
did
prejudgment interest.
to
determine
262
nature of
to
that interest is
not
hold
that
prejudgment
Taxpayer
The Factory
_______
interest
is
-16-
damages
in a
Delaney,
_______
826
(R.I.
personal injury
99 F.3d at
1986)
26 (citing DiMeo v.
_____
(determining
element of damages)).
action under
that
not an element of
Rhode Island
law."
prejudgment
interest
in
an
Having found
to determine the
purposes.
federal law
See id.
___ ___
3.
3.
The
Supreme
Court
recently
explained
the
two
Ct. 2159,
2167
"First,
that
the
giving
upon
the
taxpayer
underlying
rise to
tort
or
the
tort
must
were
cause
demonstrate
of
action
recovery is
'based
type
rights';
and
the
received
'on
account
of
Commissioner v. Schleier,
____________
________
(1995).
___ U.S.
___, 115 S.
assuredly
one based
upon tort or
tort type
rights.
We look,
prong of
excludability.
Taxpayer
appears
to argue
that
the
purpose of
the
statements
we
glean
from her
brief
-17-
to
the
effect that
the
for a
statutorily-imposed prejudgment
Court, she
We find
v. Ponte, Inc.,
___________
98
F.3d 670, 679 (1st Cir. 1996) (noting that appellants' silence as
waiver
of
that issue
on appeal);
In
addition,
adequately present
any "make
We
'to
we
note
that
Taxpayer's
whole" argument
in
failure
to
her brief
on
been waived.
spell out
else
F.2d
631, 634-35
Here,
argument, beyond
1988)).
Taxpayer
840
has failed
"It
F.2d 985,
to
is not
enough
. . or
v. Castro, 843
______
v. Massachusetts
_____________
990
put forth
injuries.
and distinctly' .
(1st
Cir.
coherent
relationship an
merely
to
mention a
possible
argument
in the
most
skeletal way,
leaving
the court
to
do
-18-
counsel's
flesh on
work, create
its bones."
(1st Cir.),
the argument,
and put
F.2d 1, 17
In re
_____
Three Additional Appeals Arising Out of the San Juan Dupont Plaza
_________________________________________________________________
in
perfunctory
manner,
developed argumentation,
at 17.
unaccompanied
Because we refuse to
by
We will
adverted to
some
effort
at
any
We decline
to pass
on this
court
predicate
on
which
compensatory component
to
make
reasoned
of prejudgment
analysis
of
any
we do
CONCLUSION
CONCLUSION
For
the
foregoing
reasons,
affirmed.
affirmed
________
-19-
the
decision
below
is