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
Company Profile - http://www.epssg.com/Professionals.aspx?professionalID=212
LinkedIn - http://www.linkedin.com/pub/john-mcculloch/2/b50/46
