1997 Tax Ct. Memo LEXIS 455 | Tax Ct. | 1997
1997 Tax Ct. Memo LEXIS 455">*455 Decisions will be entered for petitioners.
MEMORANDUM FINDINGS OF FACT AND OPINION
PARR,
| Docket No. | Petitioners | Deficiency |
| 21366-94 | George and Kathleen Knevelbaard | $ 6,592 |
| 21981-94 | Wilbur E. and Irene R. Gomes | 23,294 |
| 22527-94 | Sam S. and Cynthia L. Kooistra | 1,404 |
| 22528-94 | Walter H. and Helen Joan Brown | 2,393 |
| 22529-94 | Arnold Leroy and Rosemary Souza | 2,646 |
| 22530-94 | Vernon C. and June C. Christian | 1,680 |
| 22531-94 | Phillip A. and Llyn Souza | 5,349 |
1997 Tax Ct. Memo LEXIS 455">*456 All section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated.
The issue is whether payments received by petitioner dairy farmers from various Bank Defendants in settlement of a lawsuit are excludable from gross income as compensation for personal injuries under section 104(a)(2). We hold they are.
FINDINGS OF FACT
Some facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference. When their petitions were filed, all petitioners resided in California.
Petitioners are dairy farmers (milk producers) who sold raw milk to Knudsen Dairy (Knudsen), a large independent processor and distributor of dairy products in California. The Knevelbaards are members of the South Valley Milk Producers Cooperative, and the Christians are members of the Cal-Dari Cooperative. Petitioners Gomes, Kooistra, and Brown are independent producers. The Souzas are partners in P&L Souza Dairy.
In early 1985 Knudsen purchased Foremost Dairies (Foremost). Citicorp Industrial Credit, Inc. (Citicorp), along 1997 Tax Ct. Memo LEXIS 455">*457 with Security Pacific Business Credit, Inc., Wells Fargo Business Credit, Inc., Goldome Bank, and National Bank of Canada, provided the financing for Knudsen's purchase of Foremost (collectively, Bank Defendants). As part of the financing agreement for Knudsen's purchase of Foremost, the Bank Defendants also refinanced Knudsen's existing debt.
Knudsen entered into long-term agreements with dairy farm cooperatives and independent producers, including petitioners, for the purchase of raw milk. The contracts required Knudsen to buy all milk produced by the milk producers. Knudsen was required to pay for the raw milk twice per month; 2 the dairies were required to ship milk to Knudsen on a daily basis.
On July 14 and again on July 31, 1986, 1997 Tax Ct. Memo LEXIS 455">*458 Knudsen failed to pay the milk producers about $ 30 million for raw milk delivered to Knudsen between June 16 and July 15, 1986. On July 15, Knudsen began to make daily payments for milk delivered the previous day. However, no payments were made on the $ 30 million back debt.
When Knudsen defaulted, petitioners could not simply stop producing milk. Cows had to be milked and fed. Farmhands had to be paid. Grain had to be purchased. The farmers were operating on very slim profit margins. They faced the possibility of slaughtering their herds or pouring the milk onto the ground. For years (in some cases for more than one generation) they had relied on the regularity of the milk payments. Unexpectedly, they were faced with borrowing money, depleting their savings, and possible bankruptcy.
The uncertainty of their situation produced enormous stress, which did not end on July 15, 1986. The financial problems caused by losing payment for 4 weeks' worth of milk persisted, because the loss was not repaid. Even when Knudsen began making daily payments, there was no guarantee that the money would be there from one day to the next. Petitioners had to rearrange their lives so they could be personally1997 Tax Ct. Memo LEXIS 455">*459 present when the milk was picked up, in order to see the money before they released the milk. The situation did not stabilize for months.
The personal experiences of three of petitioners illustrate the effects of these events.
Phillip A. Souza (Souza) was in partnership with his brother, petitioner Arnold Leroy Souza. Souza has been a dairy farmer for 30 years. At the time of the default, he owned about 450 cows which had to be milked every day. Unlike many of the milk producers, Souza was able to find another dairy to buy his milk within 2 days of Knudsen's default. Even so, he lost about $ 76,000, which forced him to borrow money from his father and a bank. 3 He suffered a stress-related heart attack in 1988 (for which he takes 11 pills daily).
George Knevelbaard (Knevelbaard) was born into the dairy industry and believed, based on past experience, that "There would always be work, there would always be bills, and on the first and the 15th there was1997 Tax Ct. Memo LEXIS 455">*460 always a check in the mailbox. This was as certain as the sun rising and setting." His expenses were about 90 percent of his revenue. He was shocked to discover that the system on which he and his family had always depended was in jeopardy. Suddenly, and continuing for months, he could not predict from one day to the next whether a truck would come to pick up the milk or, if it did, whether he would be paid.
At the time of the default by Knudsen, Wilbur Gomes (Gomes) had been in the dairy business 29 years. He grew up on a dairy farm and began his own operation in 1957 with 29 cows. By 1986, he had 800 cows and 800 calves. Each cow had to be milked twice a day. The "morning milking" began at 10 p.m. the prior evening and ended at 6 a.m. The evening milking went from 10 a.m. to 6 p.m. This had to be done 365 days a year. Gomes' operation required nine full-time farmhands working 7 days per week.
Gomes began selling his milk to Borden Dairy in 1957 and continued with Knudsen when it acquired Borden in 1978. For 29 years the milk money always came, twice a month. His costs for feed and overhead were about 95 percent of his revenue. Expense payments were geared to the milk payments. 1997 Tax Ct. Memo LEXIS 455">*461 For instance, his employees were paid twice a month, on the 1st and 15th. Gomes paid his grain dealer with the milk check that came the 15th of each month. His grain bill ran between $ 30,000 and $ 40,000 per month. When the first milk check did not arrive, Gomes used up all of his life savings to pay the grain bill. Gomes' major fear was that, because of the $ 4,000 daily overhead which he could no longer pay, he would have to start slaughtering his herd of purebreds, built up over 30 years. He received an appraisal that the slaughter price as meat would be only 20 percent of the herd's value as dairy cows.
Gomes frantically looked for another place to sell his milk, going to daily meetings of dairymen's associations and cooperatives, but all to no avail, because everyone was in the same boat. In September 1986, after Knudsen sold its plant in Hughson, California, Gomes began shipping his milk to the new owners there.
Despite their stress, petitioners did not seek professional mental health assistance. Their reasons were varied. Some were cultural. Gomes was brought up in a small Portuguese community of about 2,000 people. He had been taught that an emotional problem was a sign1997 Tax Ct. Memo LEXIS 455">*462 of personal inadequacy, and to seek professional help was a thing to be shunned. Knevelbaard's reasons for not seeking professional help were religious. In times of stress he seeks consolation and encouragement through prayer and Bible reading.
Within 2 months after Knudsen defaulted on payments to the milk producers it filed a chapter 11 petition in the U.S. Bankruptcy Court for the Central District of California. The milk producers were unsecured creditors. All filed proofs of claim.
On January 12, 1989, petitioners were among nearly 1,000 milk producers, individually or through their cooperatives, who also filed a complaint against the Bank Defendants, in the action entitled
Plaintiffs alleged eight additional causes of action (the indirect causes of action) based upon a theory of the Bank Defendants' alleged derivative liability through Knudsen: (13) Breach of contract, (14) breach of implied covenant, (15) fraud/misrepresentation, (16) negligent misrepresentation, (17) intentional infliction of emotional distress, (18) negligent infliction of emotional distress, (19) breach of fiduciary duty, and (20) constructive fraud.
Causes of action 1 through 10 and 14 through 20 allege that as a proximate result of the Bank Defendants' wrongful conduct, individual MILK PRODUCERS have suffered anxiety, humiliation, 1997 Tax Ct. Memo LEXIS 455">*464 worry, mental anguish and emotional and physical distress * * * and have been injured in mind and body all to their general damage * * *.
In the prayer for relief, plaintiffs sought damages for mental suffering, emotional distress, and loss of consortium in every cause of action except Nos. 11, 12, and 13. They also sought damages for medical and related expenses and for lost earnings in every cause of action.
The alleged behavior giving rise to the complaint was that the Bank Defendants made risky loans to Knudsen for the purchase of Foremost, knowing that both Knudsen and Foremost were highly leveraged and vulnerable. As the direct lender, Citicorp took security interests in all of Knudsen's assets, 4 thereby putting in jeopardy payment to plaintiffs and other creditors. The complaint also alleged that the banks continued to give false assurances of Knudsen's solvency, inducing plaintiffs to continue to supply milk for a longer period than they otherwise would have, so that1997 Tax Ct. Memo LEXIS 455">*465 the banks' security interests would be enhanced to the detriment of plaintiffs. 5 The indirect causes of action stem from the allegation that the financing arrangements were such that they gave the banks virtual control over Knudsen and were thus indirectly responsible for its actions. The Bank Defendants denied the allegations.
The amounts claimed as general damages in Exhibit A attached to the complaint are approximately equal to the milk losses.
The milk producers were represented by Michael J. Bidart (Bidart) of Shernoff, Bidart & Darras. William J. F. Roll III (Roll) of Shearman & Sterling represented the Bank Defendants.
The milk producers action was part of a larger coordinated proceeding entitled1997 Tax Ct. Memo LEXIS 455">*466 Coordination No. 2138, which involved the Knudsen matter and included approximately 20 different lawsuits against the Bank Defendants. Generally, five groups or subsets of plaintiffs were represented. One set was the milk producers litigation, which eventually was resolved in a settlement that included plaintiffs from a separate suit filed by the Danish Creamery Association (Danish Creamery), another cooperative also represented by Bidart. The Danish Creamery plaintiffs are not petitioners in this case.
The coordinated proceedings included four other lawsuits. One was a single suit brought by Knudsen and certain affiliates and subsidiaries, known at the time as K.F. Dairies, Inc. Another was also a single action brought by parties (known as the F.D. partners) who had sold their stock in Foremost to Knudsen and had received security interests that were subordinated to those of the banks.
In addition, Citicorp filed separate cross-complaints against K.F. Dairies, Inc., and the F.D. partners for indemnification. Citicorp's suit against K.F. Dairies was based on claims stemming from the loan and security agreement between Citicorp and Knudsen. Its suit against the F.D. partners was 1997 Tax Ct. Memo LEXIS 455">*467 not based on contract but on a theory of equitable indemnity. 6
1997 Tax Ct. Memo LEXIS 455">*468 All of the coordinated lawsuits were assigned to Judge Jack Tenner.
On July 30, 1990, Judge Tenner held a settlement hearing on the milk producers action. The parties orally stipulated that all causes of action alleged in the milk producers complaint be dismissed, except for negligent infliction of emotional distress. The Bank Defendants would pay $ 20 million as payment in full for that cause of action. Judge Tenner specifically found, on the record, that the claims pending in the Knudsen
The judge then added: The Court has been with this litigation for some time and has read all of the allegations, and finds that the negligent infliction of emotional distress is a much more serious claim as far as the individual farmers are concerned; and, therefore, that would be the basis of the allocation, plus my familiarity with file cabinets full of paper in this lawsuit.
The judge stated he would approve the settlement, which was to be reduced to writing, and that negotiations on the language would begin the next night.
Roll, the banks' lawyer, prepared the first draft of the settlement agreement. The Bank Defendants' concern was twofold: That all claims be released and that none of the money being paid could fairly be said to arise out of gross negligence or willful misconduct. That was because the banks wanted to preserve a right to indemnification by Knudsen (now KF Dairies) set out in the loan and security agreements that financed the Foremost purchase. Although Knudsen was bankrupt, the banks were secured creditors and hoped to recoup as much as possible of their payment to the milk producers. This left nine possible causes of action on which to structure a settlement; i.e., Nos. 2, 4, 6, 8, 12, 13, 14, 16, and 18.
Roll was familiar with evidence, in the form of depositions and answers to written interrogatories, of particularized emotional distress suffered by several dozen milk Producer plaintiffs.
In focusing on the emotional distress issue, the Bank Defendants1997 Tax Ct. Memo LEXIS 455">*470 were also heavily influenced by an earlier off-the-record conversation with Judge Tenner, who was actively involved in the settlement talks. The banks' consistent position was that they were not liable for claims arising out of the contract between Knudsen and the milk producers for delivered and unpaid raw milk. Judge Tenner had seen the depositions and answers to interrogatories filed by dozens of dairy farmers. He expressed strong views that a jury would not care about the "technical details" but would be very sympathetic to the milk producers' individual testimony about claimed distress. 7
The judge told the Bank Defendants' counsel that in front of a jury, they could "get killed", because they were representing five large financial institutions, and plaintiffs were a thousand1997 Tax Ct. Memo LEXIS 455">*471 dairy farmers around the State of California.
Although the parties had indicated to Judge Tenner at the settlement hearing that the entire amount would be attributed to negligent infliction of emotional distress, the final written agreement attributed $ 19,328,966 to that claim and $ 671,034 to negligent interference with contractual relationship (the fourth cause of action in the Complaint, which also sought both general damages and damages for mental suffering and emotional distress). The parties wanted to be sure all plaintiffs, including entities, were covered by the settlement.
To accomplish these goals, the settlement document did not require any specific allocation to specific plaintiffs but left allocation and distribution up to plaintiffs' counsel. Paragraph 2(c) of the settlement agreement provides as follows: (c) (i) Six Hundred Seventy-one Thousand Thirty-Four Dollars ($ 671,034.00) shall be attributed to the so-called "direct" cause of action in the Milk1997 Tax Ct. Memo LEXIS 455">*472 Producers Complaint for negligent interference with contractual relationship (the fourth cause of action); and (ii) Nineteen Million Three Hundred Twenty-eight Thousand Nine Hundred Sixty-six Dollars ($ 19,328,966.00) shall be attributed to the so-called "direct" cause of action in the Milk Producers complaint for negligent infliction of emotional distress (the eighth cause of action); (iii) Nothing shall be attributed to any of the other causes of action in the Milk Producers Complaint or to any cause of action in the Danish Creamery complaint. [Emphasis added.]
Neither the Bank Defendants nor the milk producers wanted to settle on any basis relating to the contracts between Knudsen and the milk producers. The banks consistently denied any liability on the contracts, and plaintiffs wanted to retain their direct claims for nonpayment of milk against the bankruptcy estate. Moreover, such a settlement would have required the bankruptcy court's approval, which was not necessary under the agreement reached.
On August 13 and 14, 1990, a settlement agreement was signed, binding the Bank Defendants on one hand and the milk producers and Danish Creamery on the other. The Bank1997 Tax Ct. Memo LEXIS 455">*473 Defendants agreed to pay a total of $ 20 million in exchange for release of all of the milk producers and Danish Creamery claims. Funds were to be distributed among plaintiffs in both suits by plaintiffs' counsel.
The record is not clear exactly how the $ 20 million was allocated among the plaintiffs. While there seems to be some relationship between the amount recovered and the lost milk money, there was not a pro rata distribution based on an exact percentage. For instance, petitioners recovered the following amounts:
| Petitioners | Amount Owed | Recovered | Percent |
| Knevelbaard | $ 58,500 | $ 31,391 | 53.7 |
| Gomes | 118,369 | 1 62,368 | 52.7 |
| Kooistra | 10,000 | 4,993 | 49.9 |
| Christian | 12,719 | 6,487 | 51.0 |
| A.L. Souza | 37,000 | 18,721 | 50.6 |
| P.A. Souza | 37,000 | 18,721 | 50.6 |
| Brown | 16,105 | 8,545 | 53.1 |
Because both sides wished to retain their contract-based claims in other proceedings or against other parties, paragraph 6 of the settlement provided: Nothing in this Settlement Agreement in any way affects, either directly or indirectly: (a) The rights, if any, of the Milk Producers or Danish Creamery to assert their 1997 Tax Ct. Memo LEXIS 455">*474 claims in the pending KF Dairies bankruptcy proceedings or to receive distributions or other compensation in those proceedings. In the event that any such distribution is received by the Milk Producers or Danish Creamery, Bank Defendants shall not receive any credit for any distribution because the sums paid in connection with this settlement are not attributable to the contractual claims asserted by the Milk Producers and Danish Creamery in the bankruptcy proceedings; (b) The rights, if any, of the Milk Producers or Danish Creamery to compromise those bankruptcy claims or to dispose of them in any other way; (c) The rights, if any, of the Milk Producers or Danish Creamery to participate in those bankruptcy proceedings as parties-in-interest; (d) Bank Defendants' rights, if any, to assert claims for indemnity against any other entity or party; and (e) The rights or liabilities, if any, of any other entities or parties in the coordinated proceedings or in the insolvency proceedings.
After the milk producers action settled, petitioners (and all other milk producers) still had outstanding claims in the Knudsen bankruptcy action for the value of the milk. Most of the milk producers1997 Tax Ct. Memo LEXIS 455">*475 released their bankruptcy claims in exchange for an assignment by Knudsen of its causes of action for breach of fiduciary duty against its individual directors and officers. They recovered small additional amounts from the directors and their insurance company. For instance, Knevelbaard received $ 5,048.32 on a $ 58,500 loss; Gomes received $ 6,368 of $ 118,369.
OPINION
Petitioners reserved several objections in the stipulation of facts.
One group of objections centers around the admission of documents or facts concerning lawsuits, other than the milk producers action, related to the Knudsen default. These concern, for instance, (1) petitioners' release of claims in the bankruptcy action in exchange for an assignment of Knudsen's claims against its directors and their insurer; (2) the banks' indemnification rights against Knudsen and Foremost; and (3) the Danish Creamery complaint. We believe the exhibits in groups 1 and 2 are relevant to the parties' motivations in structuring the settlement. The Danish Creamery complaint may have slight relevance, since its plaintiffs were included in the milk producers settlement; however, since the complaint was dismissed1997 Tax Ct. Memo LEXIS 455">*476 in its entirety, we give it little weight.
Another group of disputed stipulations shows that petitioners did not receive treatment from mental or physical health care workers as a result of actions by the Bank Defendants. Petitioners also object to stipulations as to some of them concerning the absence of loss of consortium. They contend these facts are irrelevant in proving whether they actually suffered emotional or physical distress. We think this objection goes to the weight of the evidence, not to its relevance. Certainly, if petitioners
Paragraphs 87, 97, and 109 of the stipulation (in re the Christians, Arnold Leroy and Rosemary Souza, and the Browns) state that petitioners: admit that the actual division of settlement proceeds among all of the Milk Producer Plaintiffs was made on the basis of the quantities of milk delivered by each of the Milk Producer Plaintiffs and not on the amount of emotional distress suffered by them.
Other disputed paragraphs seek to establish that petitioners' representatives in the milk producers action utilized tax advice regarding the settlement. Since this may be relevant to the motivation of the parties in structuring the settlement, we overrule the objection.
Petitioners also object to paragraph 51 and Exhibit 21-U on the basis of
Finally, we overrule petitioners' objection to Exhibit 35-AI, stipulation re amendment of Exhibit A to milk producer plaintiffs' third amended complaint. It is an intrinsic part of Exhibit 16-P, the complaint, which has been stipulated and forms an important part of the evidence. Exhibit 35-AI is received.
Respondent contends the settlement payment was really for the lost milk under the contract between the milk producers and Knudsen. Petitioners contend it was for emotional distress, as delineated in the settlement agreement. We agree with petitioners.
Section 61(a) provides a broad definition of "gross income": "Except as otherwise provided in this subtitle, gross income means all income from whatever source derived". Thus, petitioners' settlement proceeds constitute gross income unless expressly excepted by another provision in the Code.
Section 104(a)(2) excludes from gross income the amount of any damages received (whether by suit or agreement) on account of personal injuries or sickness. The term "damages received * * *" means an amount received (other than workmen's compensation) 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.
Respondent contends that petitioners have satisfied neither test. Respondent argues that "the Milk Producers' recovery arose out of garden-variety breach of contract and economic-injury torts stemming from the breach." Further, says respondent, the proximate cause1997 Tax Ct. Memo LEXIS 455">*480 of the damages petitioners recovered was economic injury from Knudsen's breach of its contractual duty to pay for delivered milk.
Respondent contends that "The primary focus of the Milk Producers Complaint and the counts alleged therein was Knudsen's contractual relationship with petitioners and the breach of that relationship." We disagree.
The tax consequences of a settlement depend on the nature of the litigation and on the origin of the claim but not on the validity of that claim.
In
Here, under 17 of the 20 causes of action alleged, petitioners sought damages for mental suffering and emotional distress. They also sought general damages and interest and, in some causes of action, exemplary and punitive damages. Of the 12 causes of action based upon the Bank Defendants' direct liability, Nos. 1 through 10 are clearly torts or tortlike. In fact, of the 20 causes of action, direct and indirect, at most 4 (Nos. 11, 12, 13, and arguably 14) do not sound in tort.
The origin of the milk producers' complaint against the banks was that they made risky loans to Knudsen, knowing that it was financially shaky, under conditions which practically guaranteed they (the banks) would be repaid at the expense of the milk producers. 1997 Tax Ct. Memo LEXIS 455">*482 The complaint also alleged that the banks lied to the milk producers to induce them to continue to provide milk after the banks knew that Knudsen was about to default, thereby putting the plaintiffs in more jeopardy, and causing foreseeable harm, all to make themselves more secure. This was a claim separate and apart from plaintiffs' contract claims against Knudsen.
The origin of the claim for milk losses (raised in the bankruptcy court and in claims against Knudsen's directors) was Knudsen's breach of contract. However, the milk producers had no contract with the banks. The origin of the claims in the milk producers action against the banks was the Bank Defendants' behavior. We think it significant that the settlement agreement did not foreclose petitioners' rights to collect the full amount of milk proceeds in other arenas. In fact, they did eventually collect small amounts from the directors' insurance. 8
1997 Tax Ct. Memo LEXIS 455">*483 We hold that the milk producers action was based upon tort or tortlike rights.
Finally, we examine whether the proceeds were paid "on account of" the emotional harm done. Respondent argues they were paid on account of Knudsen's default and not on account of petitioners' emotional distress. We disagree. Petitioners' claims against the banks were (except for the derivative claims, which were dismissed by agreement) separate and apart from their claims against Knudsen. While petitioners undoubtedly suffered emotional harm from the default itself, they alleged additional and separate harm caused by the banks' violation of duties owed to them. Moreover, the settlement did not affect or limit their right to pursue any and all claims for lost milk money in bankruptcy or another forum.
Petitioners must prove their recovery was received on account of personal injuries or sickness. Respondent points to the lack of bills for medical or psychiatric treatment and the lack of personalized proof of individual damages, arguing that the recovery was simply payment for the lost milk, not for emotional distress. Again, we disagree.
"Personal injury" within the1997 Tax Ct. Memo LEXIS 455">*484 meaning of section 104(a) (2) comprehends both tangible and intangible harms.
While the incurring of expenses for medical or psychiatric treatment would be relevant to show harm, they are not required in order to prove that stress was endured. Petitioners' testimony convinces us that their experiences produced serious and prolonged stress. Proof of emotional distress is not limited to the presentation of medical bills. 9
1997 Tax Ct. Memo LEXIS 455">*485 Nor do we think the fact that the damages were
Furthermore, there were nearly 1,000 dairy farmer plaintiffs. To have assessed the individualized emotional harm suffered by each would have been exceedingly time consuming and expensive, if not administratively impossible, resulting in a smaller recovery to each plaintiff. The pro rata distribution was a practical, commonsense solution under the circumstances.
Petitioners rely on
Here, Roll, the banks' chief negotiator, testified that the money was paid "not for the value of milk, but for the value, if you will, of the emotional distress claims asserted by these individual producer plaintiffs."
Respondent points to the lack of an adversarial relationship between the Bank Defendants1997 Tax Ct. Memo LEXIS 455">*487 and petitioners in structuring the settlement. Petitioners' concern was in receiving as much money as possible. The banks, however, were very concerned about which of petitioners' claims was the basis for the settlement agreement; they wanted to avoid claims based on gross negligence or willful misconduct, in order to protect their right to indemnity.
In
The Court of Appeals agreed with the Tax Court's finding that the allocation was not entered into in a bona fide adversary proceeding and that the judgment was simply "rubber stamped" by the State court. The testimony of the attorneys who represented the taxpayers in their suit against the bank supported this Court's finding that the bank allowed the Robinsons to allocate the settlement proceeds in any way they wished. The circumstances surrounding the State court judge's entry of judgment also supported those findings, in that the parties presented the final judgment to the judge at his home in the evening, the meeting lasted no longer than 1 hour, and neither the final judgment nor the settlement agreement was discussed in detail during that meeting. Therefore, the Tax Court did not give conclusive effect to the State court judgment's allocation of settlement proceeds and instead allocated the proceeds on the basis of the jury verdict, "the best indication of the worth of the Robinsons' claims."
This case is distinguishable from
1997 Tax Ct. Memo LEXIS 455">*490 Respondent also relies on
We therefore hold that the underlying claim giving rise to the recovery was based upon tort or tortlike rights, and that the settlement proceeds were received on account of personal injuries. The amounts recovered are excludable from income under section 104(a) (2).
To reflect the foregoing,
Footnotes
1. Cases of the following petitioners are consolidated herewith: Wilbur E. Gomes and Irene R. Gomes, docket No. 21981-94; Sam S. Kooistra and Cynthia L. Kooistra, docket No. 22527-94; Walter H. Brown and Helen Joan Brown, docket No. 22528-94; Arnold Leroy Souza and Rosemary Souza, docket No. 22529-94; Vernon C. Christian and June C. Christian, docket No. 22530-94; and Phillip A. Souza and Llyn Souza, docket No. 22531-94.↩
2. According to the stipulation, the contract required payment on the 13th and 28th days of each month. However, petitioners testified that they received payment on the 15th and either the last day of the month or 1st day of the succeeding month. The discrepancy is not material.↩
3. As of Dec. 14, 1995, the money had not all been repaid.↩
4. The other Bank Defendants were participants in the loan (i.e., they bought parts of the loan after it was made) and did not have direct security interests.↩
5. The milk producers, in fact, lost payment for 4 weeks' worth of raw milk worth about $ 30 million before Knudsen began paying on a daily, C.O.D. basis.↩
6. The related suits were conditionally settled in an agreement dated Aug. 23, 1990. The settlement was subject to various conditions and events in the future. Unlike the situation of the milk producers settlement of Aug. 13, 1990, this settlement required the approval of the bankruptcy court.
One contingency in the Aug. 23 agreement was the banks' obtaining releases by the milk producer plaintiffs of their claims as unsecured creditors of the bankruptcy estate, in return for an assignment by Knudsen of its causes of action for breach of fiduciary duty against its individual directors and officers.
The agreement called for a plan of reorganization of Knudsen and its affiliates to be jointly proposed by all the various parties (not including the milk producers), reflecting an agreed division of the remaining assets in the estate. When the reorganization was finally confirmed and effected, the lawsuits would be finally dismissed with prejudice.
The record does not reflect whether or when the cases were actually dismissed with prejudice.↩
7. Respondent objected to the admission of Judge Tenner's comments as hearsay. Those comments are received not for the truth of the matter asserted but for the effect of Judge Tenner↩'s views on the chief negotiator for the Bank Defendants.
1. Petitioners Gomes received $ 2,012 of this amount in 1991.↩
8. See
Banks v. United States , 81 F.3d 874">81 F.3d 874id.↩ at 8769. Although Souza suffered a stress-related heart attack in 1988, and undoubtedly incurred medical expenses, as one of 1,000 plaintiffs he was not asked for, nor did he give, a personal description of his medical situation to the lawyers for either side.↩
10. Knevelbaard was one of the dairymen whose depositions were taken in the milk producers action.↩