Rebecca A. Tressler

T.C. Summary Opinion 2021-33

UNITED STATES TAX COURT

REBECCA A. TRESSLER, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 6987-19S. Filed September 13, 2021.

Laila E. Leigh, for petitioner.

Ka Tam and Bartholomew Cirenza, for respondent.

SUMMARY OPINION

GREAVES, Judge: This case was heard pursuant to the provisions of

section 7463 of the Internal Revenue Code (Code) in effect when the petition was

Served 09/13/21

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filed. 1 Pursuant to section 7463(b), the decision to be entered is not reviewable by

any other court, and this opinion shall not be treated as precedent for any other

case.

Petitioner received a $55,000 settlement payment from her former employer

in 2014 and seeks to exclude at least half this amount from her 2014 gross income.

Specifically, petitioner claims that because she received a portion of the settlement

payment on account of personal physical injuries or physical sickness, that portion

is excludable under section 104(a)(2). We hold that she may exclude only $6,980

of the payment. That amount corresponds to the $6,980 she paid out of pocket for

psychotherapy from mid-2012 to the end of 2014, which was medical care for

emotional distress.

Background

The parties filed stipulations of facts with attached exhibits and stipulations

of settled issues, all of which are incorporated by this reference. Petitioner resided

in Virginia when she filed the petition.

Unless otherwise noted, all section references are to the Code in effect for

1

the relevant times, and all Rule references are to the Tax Court Rules of Practice

and Procedure.

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Petitioner filed a lawsuit against the National Railroad Passenger Corp.

(Amtrak), her employer at the time, in the U.S. District Court for the District of

Columbia on October 28, 2009. On October 29, 2010, petitioner amended her

complaint. The amended complaint explained that petitioner had worked for

Amtrak as a railroad engineer and road foreman since 1987, and it asserted a litany

of claims focused on workplace harassment and retaliatory employment practices.

Among other claims, petitioner alleged she had endured emotional distress and that

she experienced a workplace sexual assault, physical injuries resulting from a

workplace stalking incident, physical manifestations of stress caused by the hostile

work environment, and an injury to her ankle sustained exiting a train while on

duty.

The District Court granted Amtrak’s motion for summary judgment on

November 30, 2012, and petitioner appealed the judgment to the U.S. Court of

Appeals for the District of Columbia Circuit. In February 2014 petitioner and

Amtrak agreed to settle the case for an $82,500 payment from Amtrak to

petitioner. In section 1 of the settlement agreement petitioner “waives and releases

any and all claims” against Amtrak and certain related parties “arising from or

relating to any and all acts, events and omissions occurring prior to” February 21,

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2014, the date petitioner signed the agreement. 2 Section 2 establishes the payment

terms. In particular section 2.1 provides that Amtrak will withhold taxes on

$27,500 of the settlement payment, which represents “settlement of Ms. Tressler’s

claims against Amtrak” in her lawsuit. Section 2.2 provides that the remaining

$55,000 represents “settlement of Ms. Tressler’s claim for emotional distress

damages related to her allegations” in the lawsuit. Section 2.5 explains that the

payments provided in section 2.1 and 2.2 are “inclusive of all claims by Ms.

Tressler for any alleged damages against Amtrak, including, but not limited to, any

alleged claims for physical injuries, emotional distress, attorneys’ fees, and costs”.

Amtrak paid the full $82,500 by check on May 1, 2014.

Petitioner first sought psychiatric help in 2006. She was later treated for

post-traumatic stress disorder (PTSD) arising from the workplace sexual assault

and her other traumatic experiences as an Amtrak employee. Petitioner began

seeing her current therapist in 2012 and incurred $4,580 out of pocket for

2

References to sections 1 and 2, including section 2.1, 2.2, and 2.5, are to the

settlement agreement.

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psychotherapy from July 5, 2012, to February 24, 2014. 3 Petitioner incurred an

additional $2,400 through the end of 2014 and further charges from 2015 to 2018.

Petitioner did not timely file a U.S. individual income tax return for 2014.

Pursuant to section 6020(b), respondent prepared a substitute for return for

petitioner’s 2014 tax year that includes the entire $82,500 payment in gross income

and sent petitioner a notice of deficiency for 2014 dated March 4, 2019. Petitioner

sought redetermination of the deficiency in this Court on May 1, 2019. 4 She does

not contest the inclusion of the $27,500 portion of the payment but asserts that

section 104(a)(2) allows her to exclude at least half, if not all, of the $55,000

balance.

3

The Court finds that the actual end date is February 24, 2014, even though

the stipulation gives the end date as February 24, 2012. See Rule 91(e); Cal-Maine

Foods, Inc. v. Commissioner, 93 T.C. 181, 195 (1989) (holding that the Tax Court

may disregard a stipulation between parties where justice requires it if the

stipulation is clearly contrary to the facts disclosed by the record).

4

If we find that any portion of the $55,000 constitutes taxable income,

petitioner asks us not to impose the sec. 6651(a)(1) addition to tax for failure to file

or the sec. 6651(a)(2) addition to tax for failure to pay that respondent determined.

We do not address these items because petitioner concedes in the stipulation of

settled issues that she is liable for both additions to tax “in an amount to be

redetermined based on the tax liability ultimately decided by the Tax Court.” See

Rule 91(e); Dorchester Indus. Inc. v. Commissioner, 108 T.C. 320, 334-335 (1997)

(explaining that a court will not set aside a settlement stipulation unless good cause

is shown), aff’d, 208 F.3d 205 (3d Cir. 2000). Furthermore, the parties agree that

petitioner is not liable for the sec. 6654 addition to tax that respondent determined

for failure to pay proper estimated tax.

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Discussion

The Commissioner’s determinations set forth in a notice of deficiency are

generally presumed correct, and the taxpayer bears the burden of proving that the

determinations are in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933). Petitioner does not contend, and the evidence does not establish, that the

burden of proof shifts to respondent under section 7491(a) as to any issue of fact.

A taxpayer must keep all books and records necessary to substantiate any claimed

exclusion from gross income. See sec. 6001; sec. 1.6001-1(a), Income Tax Regs.

Settlement proceeds paid to a taxpayer constitute gross income unless the

taxpayer proves they fall within a specific statutory exception. See Commissioner

v. Schleier, 515 U.S. 323, 328-337 (1995). Section 104(a)(2) supplies one such

exception, excluding from gross income “any damages (other than punitive

damages) received (whether by suit or agreement * * *) on account of personal

physical injuries or physical sickness”. Damages for emotional distress generally

do not qualify for the section 104(a)(2) gross income exclusion because emotional

distress is not treated as a physical injury or physical sickness. See sec. 104(a)

(flush text); sec. 1.104-1(c)(1), Income Tax Regs. The foregoing authorities create

two exceptions to this rule: Section 104(a)(2) does exclude from gross income

(1) damages for emotional distress attributable to a physical injury or physical

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sickness and (2) damages not in excess of the amount paid for medical care

described in section 213(d)(1)(A) or (B) for emotional distress. Section

213(d)(1)(A) includes amounts paid “for the diagnosis, cure, mitigation, treatment,

or prevention of disease, or for the purpose of affecting any structure or function of

the body”. This Court has held that this definition of medical care includes

psychotherapy. See Fischer v. Commissioner, 50 T.C. 164, 173, 176 (1968).

When a taxpayer receives damages pursuant to a settlement agreement, the

nature of the claim that was the basis for the settlement controls whether the

damages are excludable under section 104(a)(2). See United States v. Burke, 504

U.S. 229, 237 (1992); Bagley v. Commissioner, 105 T.C. 396, 406 (1995) (“[T]he

critical question is, in lieu of what was the settlement amount paid[?]”), aff’d, 121

F.3d 393 (8th Cir. 1997). What petitioner and Amtrak intended to compromise

through the settlement agreement is a question of fact determined by reference to

the text of the agreement. See Simpson v. Commissioner, 141 T.C. 331, 340

(2013), aff’d, 668 F. App’x 241 (9th Cir. 2016). Where the agreement does not

disclose the nature of the claim underlying a settlement payment, we look to the

payor’s intent, examining extrinsic evidence including the allegations in the

payee’s complaint. See id.; Bent v. Commissioner, 87 T.C. 236, 245 (1986), aff’d,

835 F.2d 67 (3d Cir. 1987).

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The plain text of section 2.2 establishes that the $55,000 payment represents

“settlement of Ms. Tressler’s claim for emotional distress damages related to her

allegations” in the lawsuit. Petitioner points to section 2.5, which provides that the

$82,500 payment “is inclusive of all claims by Ms. Tressler for any alleged

damages against Amtrak, including, but not limited to, any alleged claims for

physical injuries, emotional distress, attorneys’ fees, and costs”. We recognize that

petitioner’s complaint in District Court included allegations of physical injuries,

but section 2.5 does not state that any part of the $55,000 payment is attributable to

the settlement of a physical injury claim. Section 2.5 is a general exculpatory

provision whereby petitioner relinquishes the right to further sue Amtrak. This

Court has held that a general liability release does not supersede explicit

contractual text providing a settlement payment for emotional distress. See Doyle

v. Commissioner, T.C. Memo. 2019-8, at *12, *15. We simply cannot accept

petitioner’s request to allocate the $55,000 payment among her claims for

“physical injuries, emotional distress, attorneys’ fees, and costs” when section 2.2

attributes the whole $55,000 to her claim for emotional distress damages related to

her claims in the lawsuit.

Although the text of the settlement agreement itself resolves this issue,

petitioner points us to extrinsic evidence that Amtrak “had every reason to

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compensate” her for her physical injuries, which were well known to Amtrak when

it settled the case. Petitioner testified that she was the victim of a violent sexual

assault that occurred while she was on duty at Amtrak, and that Amtrak was aware

of the assault. While the Court found her testimony credible, the absence from

section 2.2 of any reference to physical injuries represents a conscious choice by

petitioner and Amtrak to exclude physical injuries, including any physical injuries

from the sexual assault, from the $55,000 settlement allocation.

That leaves the question whether petitioner can exclude any of the payment

under either of the two exceptions to the general rule that emotional distress

damages are outside the scope of section 104(a)(2). We reject petitioner’s

argument that the first exception allows her to exclude from 2014 gross income at

least half the $55,000, which she says compensates her for emotional distress

resulting from her workplace injuries. Section 2.2 of the settlement agreement

allocates the $55,000 to petitioner’s emotional distress but does not say what

caused her emotional distress. Following the Tax Court’s suggestion in Bent, we

turn to petitioner’s amended complaint in District Court, which attributes her

emotional distress to the harassment and retaliation she endured on the job, not to

any physical injuries. The complaint repeatedly alleges that petitioner sustained

emotional distress “as well as” physical injuries, and the portion of the complaint

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describing her physical injuries does not allege any associated emotional distress.

Neither the District Court opinion granting Amtrak’s summary judgment motion,

Tressler v. Nat’l R.R. Passenger Corp., No. 09-cv-2027 (RLW) (D.D.C. Nov. 30,

2012), nor the materials in our record relating to the settlement process, 5 reference

emotional distress attributable to physical injuries.

The second exception permits a taxpayer to exclude damages not in excess

of the amount paid for medical care for emotional distress. Petitioner has not

carried her Rule 142(a) burden of establishing her right to exclude any of the

$55,000 on account of her expenditures on psychiatric medication, or on

psychotherapy through 2011. She testified that she does not remember how much

she spent on these items, and has not complied with her obligation to maintain

documentary proof of these expenditures.

On the other hand, petitioner may exclude $6,980 of the settlement proceeds,

which corresponds to the $6,980 her psychotherapist billed from July 5, 2012, to

the end of 2014. Section 104(a)(2) permits a taxpayer to exclude the amount

5

These materials include petitioner’s mediation statement, which sets forth

her arguments for reversal of the trial court decision (Ex. 17-J), available email

correspondence between her counsel and Amtrak pertaining to settlement

discussions (Ex. 18-J), the transcript of her deposition by Amtrak on June 30, 2011

(Ex. 20-J), and Exhibit 18 of the deposition, a chiropractic intake form she

completed (Ex. 21-J).

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“paid” for medical care, as opposed to the amount incurred. Although the record

does not disclose when petitioner paid the bills, we infer she paid for each therapy

session on or about the date it occurred, because the billing statement shows she

paid for each session with a unique check, and the therapist consistently

administered therapy over a period of years. Psychotherapy is medical care for

purposes of section 104(a)(2), and petitioner received psychotherapy to help her

cope with her PTSD.

As for any psychotherapy bills petitioner paid after 2014, a taxpayer must

report an unrestricted cash payment as income for the year in which it was

received, irrespective of any possible subsequent events. See N. Am. Oil Consol.

v. Burnet, 286 U.S. 417, 424 (1932); Green Gas Del. Statutory Tr. v.

Commissioner, 147 T.C. 1, 58-59 (2016), aff’d, 903 F.3d 138 (D.C. Cir. 2018).

Petitioner must recognize the remaining $48,020 as income for 2014 because she

received the $55,000 settlement payment in 2014, which she was free to spend

however she chose. Section 6214(b) allows us to determine petitioner’s liability

only for the year shown on the notice of deficiency, see Williams v.

Commissioner, 131 T.C. 54, 55 (2008), so we do not address the tax treatment in

later years of any subsequent amounts she spent on psychotherapy.

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To reflect the foregoing,

Decision will be entered

under Rule 155.