Tuesday, August 14, 2012

Court Rules Depression is a Taxable Damage


In Blackwood v. Commissioner, T.C. Memo. 2012-190, No. 23530-10, the Tax Court sided with the IRS in finding that the symptoms of depression do not qualify as a tax exempt physical injury.

Julie Blackwood (“Blackwood”) worked for Siemens as a trainer assigned to Siemens' client, the Charleston Area Medical Center (“hospital”). Her job duties included training hospital personnel in the use of a Siemens-developed computer program for the collection of patient information at the time of the patient's admission to the hospital.  

Following the admission of her son to the hospital in December 2007, Blackwood observed the hospital nurse taking her son's medical history without using the Siemens data entry program. Following the release of her son from the hospital, Blackwood used her Siemens access to view her son's electronically stored medical records. Upon review Blackwood learned that the hospital nurse had input information regarding questions she failed to ask her son during the admissions process. Blackwood reported her observation of the hospital nurse's use of the Siemens system to her superiors at work and requested guidance as to how to report the hospital nurse's actions. Upon returning to work on January 3, 2008 after vacation Blackwood was informed that her employment had been terminated by Siemens because she had accessed her son's hospital medical records without permission and in violation of the Health Insurance Portability and Accountability Act. 

Before January 3, 2008, Blackwood suffered from depression. As a result of her termination, her depression relapsed, causing her to suffer symptoms such as insomnia, sleeping too much, migraines, nausea, vomiting, weight gain, acne, and pain in her back, shoulder and neck.

On August 21, 2008, Blackwood signed a confidential settlement agreement in which Siemens agreed to pay her $100,000 for alleged damages for illness and medical expenses allegedly exacerbated by, and allegedly otherwise attributable to Blackwood’s alleged wrongful discharge. The settlement agreement stated that Blackwood was responsible for all applicable taxes, if any, as a result of the receipt of the settlement and was issued a Form 1099-MISC reporting the $100,000 Siemens paid to her in 2008. On the advice of counsel, Blackwood did not report or disclose the $100,000 as income on her Federal income tax return for 2008. On July 26, 2010, the IRS issued Blackwood a notice of deficiency for 2008; and Blackwood subsequently filed a petition disputing the deficiency. 

In order for damages to be excludable from gross income under Section 104(a)(2), a taxpayer must demonstrate that the damages were received on account of personal injuries that are physical or a sickness that is physical. The court focused on whether Blackwood’s depression symptoms qualified as a physical injury or physical sickness under Section 104(a)(2).

Blackwood provided medical documentation that she suffered from increased levels of anxiety and depressive symptoms that seemed directly related to the termination from her job, and that she was receiving psychiatric services and medications from a psychiatrist. There was no documentation that Blackwood suffered from any physical injuries or specific physical symptoms of depression. At trial Blackwood testified that she suffered from insomnia, sleeping too much, migraines, nausea, vomiting, weight gain, acne, and pain in her back, shoulder, and neck as a result of her depression.  

The flush language of Section 104(a) provides: "For purposes of paragraph (2), emotional distress shall not be treated as a physical injury or physical sickness." The legislative history of Section 104(a) states it "is intended that the term emotional distress includes symptoms (e.g., insomnia, headaches, stomach disorders) which may result from such emotional distress." H.R. Conf. Rept. No. 104-737, at 301 n.56 (1996), 1996-3 C.B. 741, 1041. The legislative history of Section 104 specifically contemplates that emotional distress may manifest itself in physical symptoms by explicitly listing physical symptoms as symptoms that may result from emotional distress. Congress' listing of physical symptoms of emotional distress is evidence of Congress' intent to establish that not every physical symptom will qualify as a physical injury or physical sickness under Section 104(a)(2). Therefore, the fact that a taxpayer suffers physical symptoms from emotional distress does not automatically qualify the taxpayer for an exclusion from gross income under Section 104(a)(2).  

Blackwood relied on the recent case of Domeny v. Commissioner, T.C. Memo. 2010-9, 2010 Tax Ct. Memo LEXIS 9.  In Domeny, the taxpayer suffered from multiple sclerosis. Due to a hostile and stressful work environment, Domeny's MS symptoms began to worsen and her primary care physician determined the taxpayer was too ill, because of her MS symptoms, to return to work. After giving the physician's instructions to her supervisor, Domeny was terminated from her job. After her termination, Domeny’s MS symptoms began spiking. The Tax Court found the worsening of her MS due to be excludable under Section 104(a)(2). 

The court distinguished Blackwood’s case from Domeny, finding Blackwood’s symptoms did not show the level of physical injury or physical sickness in Domeny and that she did  not provide evidence that her physical symptoms of depression were severe enough to rise to the level of a physical injury or physical sickness. Therefore, the court concluded that Blackwood’s depression and corresponding physical symptoms did not qualify as physical injuries or physical sickness under Section 104(a)(2) and that the $100,000 settlement payment from Siemens was taxable. 

Section 6662(a) imposes a 20% accuracy-related penalty on any portion of an underpayment attributable to a substantial understatement of income tax.  Blackwood testified that she was advised by her counsel that the settlement payment was not taxable. Her counsel was both a certified public accountant and lawyer. The court concluded that Blackwood acted with reasonable cause and in good faith as to excluding the settlement payment from gross income and was therefore not liable for the accuracy-related penalty under Section 6662(a). 

Author’s Note:  We see yet another emotional distress case deemed taxable by the IRS and upheld by the Tax Court.  The novel aspects of this one include a misreading of the Domeny case by Blackwood’s counsel (Domeny already had a physical sickness that was worsened by her employer), as well as the fact a lawyer who was also a CPA would counsel their client that an emotional distress injury was tax free.  This has been the law since 1996 and nothing in the Domeny decision would change that.

For help with any employment, D&O, E&O or taxable/punitive case, please contact:

John McCulloch, JD, FLMI, CSSC
Vice President, EPS Settlements Group
1300 W. Belmont Avenue, Suite 306
Chicago, IL 60657
630-864-8420 cell
773-880-1478 office

Email me - jmcculloch@structures.com
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Friday, August 3, 2012

UBS client from Miami Beach, Florida sentenced to prison


    Akerman Senterfitt  July 30 2012
   
A former UBS, AG ("UBS") client from Miami Beach, Florida was sentenced to four months in federal prison for willfully failing to file a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts ("FBAR"), for the UBS account the man held with as much as $4,000,0000 in it. This information was released by the U.S. Attorney for the Southern District of Florida on July 25, 2012.

The former UBS client paid a civil penalty of $2,000,000 related to the $4,000,000 high account balance stemming from tax year 2006. Additionally, the former UBS client was sentenced to four months in federal prison, three years of supervised release, 250 hours of community service and a $20,000 criminal fine.

The UBS account related to two offshore corporations owned by the man, one in the Virgin Islands and one in the Republic of Panama. These corporations opened accounts at UBS. The man was not named as the direct owner but instead he was deemed only the "beneficial owner." The accounts with UBS were opened from tax years 2005 through 2007.

It is stated that the man was aware of the obligation on the FBAR to report as he had previously filed FBARs for other offshore corporations. An FBAR is required to be file by both U.S. citizens and residents who have a financial interest in or signatory authority over a non-U.S. financial account with a value of more than $10,000 at any point during the tax year. The $10,000 amount is an aggregation of all non-U.S. financial accounts and not just an analysis on an account by account basis. See our Practice Update.

The information on the former UBS client was turned over after UBS agreed in February, 2009 to pay $780,000,000 under a deferred prosecution agreement to settle the claim that UBS conspired to defraud the U.S. by impeding the Internal Revenue Service ("IRS"). UBS also agreed to turn over information to the U.S. Department of Justice on 300 account holders. See our Practice Update.

A US citizen or resident that held an account with UBS or any other institution that has not filed the necessary FBARs for the last eight tax years, should immediately reach out to legal counsel to discuss any potential issues they may have and their alternatives.