1997 Tax Ct. Memo LEXIS 327 | Tax Ct. | 1997
MEMORANDUM OPINION
TANNENWALD, JUDGE: Respondent determined a deficiency in petitioners' Federal income tax in the amount of 10,925.00 for the taxable year 1992. The issue for decision is whether petitioners1997 Tax Ct. Memo LEXIS 327">*328 may exclude from gross income under
This case was submitted fully stipulated under Rule 122. The stipulation of facts and the attached exhibits are incorporated herein by this reference. Petitioners resided in Beltsville, Maryland, at the time they filed their petition.
BACKGROUND
Petitioner Dorothy M. Keel (Mrs. Keel) was employed by International Business Machines Corporation (IBM) until her termination in 1992. In 1992, IBM terminated thousands of its employees pursuant to a corporate restructuring plan. Mrs. Keel received a lump-sum payment of 40,411.21 from IBM in 1992 (the lump- sum payment) in connection with her termination. The amount of the lump-sum payment was based on length of her service and salary.
On June 15, 1992, Mrs. Keel signed a General Release and Covenant Not to Sue (the release) as a condition for the sums and benefits, including the lump-sum payment, she received pursuant to the terms of the Modified and Extended Individual Transition1997 Tax Ct. Memo LEXIS 327">*329 Option Program (ITO-II Program) offered by IBM. Pertinent sections of the release read as follows:
In exchange for the sums and benefits which you will
receive pursuant to the terms of the * * * ITO-II Program,
Dorothy M. Keel (hereinafter "you") agrees to release * * *
IBM from all claims, demands, actions or liabilities you may
have against IBM of whatever kind, including but not limited to
those which are related to your employment with IBM or the
termination of that employment. * * * You also agree that this
release covers, but is not limited to, claims arising from the
Age Discrimination in Employment Act of 1967, as amended, Title
VII of the Civil Rights Act of 1964, as amended, and any other
federal or state law dealing with discrimination in employment
on the basis of sex, race, national origin, religion,
disability, or age. You also agree that this release includes
claims based on theories of contract or tort, whether based on
common law or otherwise. This release does not include your
vested rights, if any, in the IBM Retirement Plan, which survive
unaffected by this release.
1997 Tax Ct. Memo LEXIS 327">*330 * * * * * * *
3. This release does not waive any claims that you may have
which arise after the date you sign this release.
* * * * * * *
6. In the event of rehire by IBM or any of its subsidiaries
as a regular employee, you understand that IBM reserves
the right to require repayment of a prorated portion of
the ITO-II Program payment. The amount of repayment will
be based on the number of weeks off the IBM payroll
compared with the number of weeks' salary used to
calculate your payment.
On April 15, 1993, petitioners filed their 1992 Federal income tax return. They included the amount of the lump-sum payment in the amount reported on Form 1040, line 7 (Wages, salaries, tips, etc.).
Petitioners thereafter filed an Amended U.S. Individual Income Tax Return for the taxable year 1992 (the amended return), which respondent received on February 23, 1994. On that return, petitioners claimed that the lump-sum payment was nontaxable. Petitioners enclosed with the amended return a copy of the release and an1997 Tax Ct. Memo LEXIS 327">*331 article included in a newsletter entitled the ITO Newsletter, circulated among IBM employees subject to restructuring.
The article reads as follows: 2
An update to the Private Letter Ruling with the question
"Is the income from the ITO taxable or not?".
1986 states that , "except as other wise provided, gross income
means all income from whatever source derived." Accordingly, the
Supreme Court has held that any accession to wealth is presumed
to be gross income, unless the taxpayer can demonstrate that it
fits into one of the specific exclusions created by other
sections of the Code.
Code
income does not include. . . . (2) the amount of any damages
received (whether by suit or agreement and whether as lump sums
or periodic payments) on account of personal injuries or
sickness."
Based on this information and the agreement IBM and ITOers
signed the settlement amount should be nontaxable.
It seems one reader of the ITOers Newsletter submitted his
1997 Tax Ct. Memo LEXIS 327">*332 taxes and included Form 8275. This form is the one to use to
request the lump sum payment be declared nontaxable. The reader
included the separation release papers from IBM and guess what?
He got his money back.
You might want to file an update to your taxes.
Petitioners' claim for refund as set forth in the amended return was allowed on March 22, 1994. Petitioners subsequently received the refund.
Petitioners were notified on or before November 15, 1994, that respondent had determined that the lump-sum payment was taxable income to them for the taxable year 1992. Respondent issued the notice of deficiency for that year on July 21, 1995.
DISCUSSION
Initially, we deal with several arguments advanced by petitioners which are essentially directed to the proposition that respondent should be estopped from requiring them to pay tax on the lump-sum payment. These arguments are as follows: (1) in addition to relying on the information contained in the newsletter article, prior to filing the amended return, Mrs. Keel was advised by IBM's Payroll Department and by an IRS representative that the lump-sum payment was not taxable; (2) the refund1997 Tax Ct. Memo LEXIS 327">*333 was consistent with that advice; (3) petitioners have acted in good faith and respondent should do the same and not seek to negate the refund, which respondent should have reviewed more carefully and not made based on respondent's claim that the lump-sum payment is taxable; and (4) other similarly situated co- workers have not been contacted to return the refunds they obtained and respondent should not be allowed selectively to enforce the tax laws.
Leaving aside any question as to the sufficiency of petitioners' assertion by way of the stipulated, self-serving testimony of Mrs. Keel as to what she was told by an IRS representative, such erroneous advice does not bar the correction by respondent of a mistake of law on the ground of equitable estoppel.
Likewise, the granting of a refund does not preclude respondent from issuing a notice of 1997 Tax Ct. Memo LEXIS 327">*334 deficiency.3
In a similar vein, the fact that respondent may have treated other taxpayers differently has generally been considered irrelevant.
We now turn to petitioners' claim that, in any event, the lump-sum payment is excludable from gross income under
I Mrs. Keel filed an amendment tax return to my her 1992
Tax. "Code
income does not include . . . . (2) the amount of any damages
received (whether by suit or agreement and whether as lump sums
or periodic payments) on account of personal injuries or
sickness'". 1997 Tax Ct. Memo LEXIS 327">*336 Based on this information and the agreement I Mrs.
Keel signed with IBM, the settlement should be nontaxable
income.
My Mrs. Keel's amendment was based on the "personal
injuries" statement. When I Mrs. Keel signed that ITO Waiver
with IBM, I indeed suffered "personal injury". I had worked for
the company for almost twenty three years, more than half my
life at that time period, and have not rebounded either
financially or personally since that time period.
Except as otherwise provided, gross income includes income from all sources.
Under
(c) Damages received on account of personal injuries or
sickness. * * * The term "damages received (whether by suit or
agreement)" means an amount received * * * through prosecution
of a legal suit or action based upon tort or tort type rights,
or through a settlement agreement entered into in lieu of such
prosecution.
Thus, an amount may be excluded from gross income only when it was received both: (1) through prosecution or settlement of an action based upon tort or tort type rights; and (2) on account of personal injuries or sickness.
Where damages are received pursuant to a settlement agreement, the nature of the claim that was the actual basis for settlement controls whether such damages are excludable 1997 Tax Ct. Memo LEXIS 327">*338 under
Determination of the nature of the claim is factual.
The first requirement is the existence of a claim "based upon tort or tort type rights". 1997 Tax Ct. Memo LEXIS 327">*339
Petitioners have the burden of proving the specific amounts of the payments allocable to claims of tort or tort-type damages for personal injuries. Failure to meet this burden1997 Tax Ct. Memo LEXIS 327">*340 results in the entire amount's being presumed not to be excludable. See
The release in this case is the same as that in
The amount of the lump-sum payment was calculated on a number of weeks of service and Mrs. Keel's salary. The release states that if Mrs. Keel were rehired by IBM, she could be required to repay some portion of the lump-sum payment based on the number of weeks off the IBM payroll compared with the number of weeks' salary used to calculate the lump-sum payment.
Finally, we note that aside from the assertion in their memorandum brief in respect of the claimed personal injuries, see
We hold that the lump-sum payment is not excludable from gross income under
Decision will be entered for respondent.
Footnotes
1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. The excerpt as reproduced retains the original spelling and punctuation.↩
3. Respondent also has the option of pursuing recovery of an erroneous refund in a civil action brought within, generally, 2 years of making the refund. Secs. 7405, 6532(b).↩