The opinion
T.C. Memo. 2016-23
UNITED STATES TAX COURT
DEBRA ROSE THERESA BARBATO AND MICHAEL JAMES BARBATO,
Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17306-13. Filed February 16, 2016.
Debra Rose Theresa Barbato and Michael James Barbato, pro sese.
Fred Edward Green, Jr., for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
BUCH, Judge: In 2011 Debra Barbato received a $70,000 award for
emotional distress caused by her employer’s discrimination. Section 104(a)(2)1
1
Unless otherwise indicated, all section references are to the Internal
Revenue Code (Code) in effect for the year in issue, and all Rule references are to
(continued...)
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[*2] provides an exclusion from gross income for damages received for personal
physical injury or physical sickness. Damages received for emotional distress are
not excludable from gross income unless they are for medical care attributable to
emotional distress.2 Because the damages Ms. Barbato received were specifically
for emotional distress caused by her employer’s discriminatory conduct, they
cannot be excluded from gross income.
FINDINGS OF FACT
I. Ms. Barbato’s USPS Employment and Previous Work-Related Injury
Ms. Barbato began working for the U.S. Postal Service (USPS) in 1987 as a
letter carrier. In 1991 she sustained back and neck injuries in an automobile
accident while on the job.
Because of physical limitations resulting from this accident, Ms. Barbato
accepted the position of “modified letter carrier” in 1997. In this new position Ms.
Barbato did not actually carry mail but rather worked at the station answering
telephones, helping at the window, issuing post office box keys, dealing with
customer complaints, and performing other administrative duties.
1
(...continued)
the Tax Court Rules of Practice and Procedure. All monetary amounts are
rounded to the nearest dollar.
2
Sec. 104(a) (flush language).
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[*3] After the appointment of a new station manager in 2004, Ms. Barbato
experienced turmoil at work. The new manager reassigned Ms. Barbato to
carrying mail. After she returned to carrying mail, she began to have more pain.
The new manager, as well as other supervisors, made work life difficult for Ms.
Barbato by scrutinizing her work more closely than that of other employees,
retaliating against her because she requested medical accommodations, and
creating an overall hostile work environment for her. Ms. Barbato experienced
severe stress and emotional difficulties as a result.
II. Ms. Barbato’s EEOC Complaints Against USPS
Ms. Barbato filed complaints against USPS with the Equal Employment
Opportunity Commission (EEOC). Ms. Barbato claimed that USPS had violated
title VII of the Civil Rights Act of 1964, which makes it illegal for employers to
discriminate against their employees or retaliate against them for filing
discrimination complaints.3 She also claimed that USPS had violated section 501
of the Rehabilitation Act of 1973, which prohibits a Federal Government employer
3
Civil Rights Act of 1964, Pub. L. No. 88-352, tit. VII, 78 Stat. at 253
(codified as amended at 42 U.S.C. secs. 2000e through 2000e-17 (2006)).
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[*4] from discriminating against a qualified person with a disability or retaliating
against her for filing a discrimination complaint.4
On January 7, 2011, EEOC Administrative Judge Larry A. Abrams issued a
decision that Ms. Barbato was “entitled to non-pecuniary damages in the amount
of $70,000.00, for the emotional distress which * * * [she] established was
proximately caused by the discrimination” of USPS’ employees against her. Judge
Abrams’ decision stated “that * * * [Ms. Barbato] suffered from depression,
anxiety, sleep problems, and post-traumatic stress disorder, and that the conditions
were either caused by and/or exacerbated by the actions which were found to be
discriminatory”. Ms. Barbato established that she was subject to harassment
because of her disability and her prior requests for accommodation and that these
actions “created an abusive working environment” for her.
However, Judge Abrams specifically found that Ms. Barbato’s physical pain
was not caused by USPS’ discriminatory actions. He explained that “it is also
clear that * * * [Ms. Barbato] experienced significant physical distress and pain as
the result of actions which have not been found here to be discriminatory, and that
* * * [her] conditions were exacerbated by non-discriminatory actions which
4
Rehabilitation Act of 1973, Pub. L. No. 93-112, sec. 501, 87 Stat. at 390
(codified as amended at 29 U.S.C. sec. 791 (2006)).
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[*5] occurred during the same time period that the discriminatory actions were
also taking place.” Indeed, Judge Abrams noted that “[h]ad all of the physical and
emotional distress experienced by * * * [Ms. Barbato] been caused by * * *
[USPS’] discriminatory actions, * * * [she] would have been entitled to
$100,000.00 in non-pecuniary compensatory damages.”
Pursuant to this decision, USPS paid Ms. Barbato $70,000 in damages in
2011.
III. The Barbatos’ 2011 Tax Return
Ms. Barbato and her husband, Michael Barbato, filed a joint Form 1040,
U.S. Individual Income Tax Return, for 2011. USPS had issued Ms. Barbato a
Form 1099-MISC, Miscellaneous Income, for 2011 for the $70,000 damage award
and characterized it as “other income”. The Barbatos did not report this award as
taxable income on their return. Ms. Barbato believed that the $70,000 award for
emotional distress was not taxable because her emotional distress was related to
her previous physical injury.
IV. Examination
The Commissioner examined the Barbatos’ 2011 tax return and issued a
notice of deficiency on May 13, 2013. In this notice the Commissioner increased
the Barbatos’ 2011 gross income by $70,000, the amount of the award from USPS,
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[*6] added an accuracy-related penalty under section 6662 for a substantial
understatement of income tax, and made other computational adjustments.
V. Tax Court Proceeding
The Barbatos timely petitioned from the notice while residing in Nevada.
The Commissioner conceded the section 6662 accuracy-related penalty at trial.
OPINION
We must decide whether the Barbatos can exclude from their 2011 gross
income the $70,000 award Ms. Barbato received from USPS. To do so, we apply
the section 104 rules, which detail when damage awards can be excluded from
gross income.
I. Burden of Proof
The Commissioner’s determinations in the notice of deficiency are generally
presumed correct, and taxpayers bear the burden of proving otherwise.5 The
Barbatos do not dispute that Ms. Barbato received the income, but only whether it
is taxable.
5
Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
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[*7] Gross income includes all income from whatever source derived unless
there is a specific statutory exclusion or carveout in the Code.6 Taxpayers must
establish that they meet the requirements for any exclusion from gross income.7
II. Section 104(a)(2) Exclusion for Damages Received for Personal Physical
Injury or Physical Sickness
Section 104(a)(2) excludes from gross income damages taxpayers receive
for personal physical injury or physical sickness. Because emotional distress is
not considered a physical injury or physical sickness, taxpayers must include
damages they receive for emotional distress in their gross income unless the
damages are paid for medical care attributable to the emotional distress.8 But
“damages for emotional distress attributable to a physical injury or physical
sickness are excluded from income under section 104(a)(2).”9
6
Sec. 61(a); Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431-432
(1955) (holding that all “accessions to wealth” must be included in gross income
unless a specific exclusion applies).
7
Simpson v. Commissioner, 141 T.C. 331, 338-339 (2013) (stating that
“statutory exclusions, such as those provided in section 104, are to be narrowly
construed” and “taxpayers generally bear the burden of proving that they fall
squarely within the requirements for any exclusion from gross income”).
8
Sec. 104(a) (flush language).
9
Sec. 1.104-1(c), Income Tax Regs.
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[*8] The EEOC decision is clear that the damages USPS paid to Ms. Barbato
were for emotional distress attributable to discrimination, and consequently, the
Barbatos must include the damage award in their gross income. The EEOC
decision awarded Ms. Barbato $70,000 in damages for emotional distress that was
“proximately caused by the discrimination” of USPS’ employees and not for
emotional distress attributable to a physical injury or physical sickness. The
decision clearly states that Ms. Barbato’s “significant physical distress and pain”
“were exacerbated by non-discriminatory actions”. Pointedly, Judge Abrams
noted that “[h]ad all of the physical and emotional distress experienced by * * *
[Ms. Barbato] been caused by * * * [USPS’] discriminatory actions, * * * [she]
would have been entitled to $100,000.00 in non-pecuniary compensatory
damages.” These statements make clear that the damages were for emotional
distress attributable to discrimination. Consequently, the $70,000 cannot be
excluded from gross income.
III. Conclusion
Because Ms. Barbato received damages for emotional distress attributable to
discrimination and not for a physical injury or physical sickness, these damages do
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[*9] not fit within the exclusion provided in section 104(a)(2). Accordingly, the
Barbatos must include this $70,000 award in their 2011 gross income.10
To reflect the foregoing,
Decision will be entered for
respondent as to the deficiency in tax and
for petitioners as to the accuracy-related
penalty under 6662(a).
10
Damages are taxable upon receipt. See N. Am. Oil Consol. v. Burnet, 286
U.S. 417, 424 (1932).