Paul L. Caron

Tuesday, December 23, 2008

Why Are We Bailing Out These Guys?

Geo Storm Stadnyk v. Commissioner, T.C. Memo. 2008-289 (Dec. 22, 2008):

On December 11, 1996, petitioners purchased a used 1990 Geo Storm from Nicholasville Road Auto Sales, Inc. (Nicholasville Auto), for their son for $3,430. Petitioner wife tendered two checks to Nicholasville Auto in partial payment for the car, check No. 1080 for $100 and check No. 1087 for $1,100, from a checking account with Bank One, Kentucky, N.A. (Bank One). Petitioner husband had visited Nicholasville Auto on multiple occasions to search for a used car for his son. On one visit to the dealership petitioner husband attempted to test drive the Geo Storm, but it was not running. Petitioner husband returned to the dealership, and a salesman informed him that the car had been repaired. Petitioner husband test drove the car around the lot, found that it was working, and decided to purchase the car. Unfortunately, the car broke down within minutes of leaving Nicholasville Auto, approximately 7 miles from the dealership. Petitioners had the car repaired at a cost of $479.78. Petitioners attempted to contact Nicholasville Auto about the Geo Storm. However, their calls were ignored, placed on hold for long periods of time, and not returned.

Because of their dissatisfaction with the car, petitioner wife contacted Bank One to place a stop payment order on the $1,100 check. The stop payment order indicated "dissatisfied purchase" as the reason for the stop payment order. After the stop payment order, Bank One incorrectly stamped the check "NSF" for insufficient funds and returned the check to Nicholasville Auto. On February 4, 1997, Nicholasville Auto filed a criminal complaint against petitioner wife for issuing and passing a worthless check in the amount of $1,100. At approximately 6 p.m. on February 23, 1997, officers of the Fayette County Sheriff's Department arrested petitioner wife at her home in the presence of her husband, her daughter, and a family friend. Petitioner wife was taken to the Fayette County Detention Center. She was handcuffed, photographed, and confined to a holding area. At approximately 11 p.m., petitioner wife was handcuffed and transferred to the Jessamine County Jail, where she was searched via pat-down and with the use of an electric wand. She was required to undress to her undergarments, remove her brassiere in the presence of police officers, and wear an orange jumpsuit. Petitioner wife was released on bail at approximately 2 a.m. on February 24, 1997. On April 23, 1997, petitioner wife was indicted for "theft by deception over $300.00" as a result of the returned check marked for insufficient funds. These charges were subsequently dropped....

On March 7, 2002, petitioner wife entered into a mediation agreement with Bank One, under which Bank One agreed to pay petitioner wife the sum of $49,000 in settlement of the complaint against it and to provide a letter of apology to petitioner wife. ...

During the mediation discussions, petitioner wife's attorney informed petitioners that the settlement proceeds would not be taxed. The mediator and the attorney for Bank One also stated that the settlement proceeds would not be subject to Federal income tax. ...  Petitioners did not obtain any professional tax advice beyond the statements made by their attorney, the mediator, and the attorney for Bank One regarding whether or not the settlement proceeds were taxable. Petitioner wife received Form 1099-MISC, Miscellaneous Income, from Bank One reporting the payment of the $49,000 settlement for the 2002 tax year. Petitioners did not report the settlement proceeds on their 2002 tax return.

Respondent issued a notice of deficiency to petitioners on March 14, 2005, determining that for their 2002 tax year petitioners were liable for a tax deficiency of $13,119 and an accuracy-related penalty under section 6662(a) of $2,624. ...

Bank One agreed to pay the $49,000 settlement to compensate for the ordeal that petitioner wife suffered as a result of her arrest, detention, and indictment. The damages sought by petitioner wife against Bank One are stated in terms of recovery for nonphysical personal injuries: Emotional distress, mortification, humiliation, mental anguish, and damage to reputation. These types of injuries are not excludable under section 104(a)(2).

Petitioners further argue that section 104(a)(2) ... violates the Sixteenth Amendment to the extent that it taxes compensatory damages received for personal injuries. ... [P]etitioners' argument with respect to the unconstitutionality of section 104(a)(2) is without merit. ...  In Murphy, the Court of Appeals examined at length the constitutionality of taxing damage awards for nonphysical personal injuries. The court held that the taxation of awards received for personal, nonphysical injury was within the power of Congress and that such a tax was not subject to the apportionment requirement and was uniform. We see no reason to revisit this issue here. ...

Petitioners received unsolicited advice from three separate and independent individuals that the settlement would not be taxed. At least two of those individuals were disinterested parties with no relationship with petitioners. This advice confirmed petitioners' previous understanding of the taxation of settlement awards. Although none of those individuals had specialized knowledge in tax law, they were experienced in personal injury lawsuits and settlements. Petitioners acted reasonably and in good faith when following their advice and preparing their own return as they have done for over 40 years. We find that reasonable persons could disagree as to whether additional advice was required in this instance. The receipt of Form 1099 should not preclude a finding of reasonable cause. ... Accordingly, we find that petitioners are not liable for the section 6662 penalty.

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You mean bailing out the dumb lawyers who told her to ignore Section 104?

Posted by: Tom Nowinski | Dec 26, 2008 12:15:16 PM