(b),THIS OPINION MAY NOT
BE TREATED AS PRECEDENT FOR ANY
OTHER CASE.
T.C. Summary Opinion 2001-65
UNITED STATES TAX COURT
MICHAEL R. AND SHELLEY F. FAWCETT, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15851-99S. Filed May 2, 2001.
Michael R. and Shelley F. Fawcett, pro sese.
Julie L. Payne, for respondent.
GOLDBERG, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority. Unless otherwise indicated,
subsequent section references are to the Internal Revenue Code as
amended and in effect for the year at issue.
Respondent determined a deficiency in petitioners Federal
income tax in the amount of $5,526 for the 1995 tax year. - 2 -
The sole issue for decision is whether settlement proceeds
of $30,599 received by petitioners during 1995 constitute damages
excludable from gross income under section 104(a)(2).
Adjustments to wages subject to FICA and Medicare, and itemized
deductions for attorneys fees and costs are computational and
will be resolved by the Courts holding on the disputed issue in
this case.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time of filing the
petition, petitioners resided in Kent, Washington. References to
petitioner in the singular are to Shelley F. Fawcett.
Petitioners were married in early 1990. After graduating
from college in June 1990, petitioner was hired by PayLess Drug
Stores, Norwest, Inc. (PayLess) as a supervisor trainee.
Petitioner was initially placed in a PayLess store in Redmond,
Oregon, even though Mr. Fawcett at that time was in the military
and stationed in Washington. Petitioner directly reported to an
assistant store manager and/or a store manager.
Approximately 4 months later, petitioner was transferred to
a PayLess store located in Bellevue, Washington, only to be
subsequently transferred in 6 months to Twin Lakes, Washington.
Petitioner worked at the Twin Lakes store for approximately 9
months. Petitioner was transferred on 2 more occasions to
different stores in Washington. Within a 3-year period, - 3 -
1
At times, petitioner was scheduled to close the store at
9:30 p.m. and then open the store the next morning at 5 a.m.
2
The strain of petitioners working conditions took a toll on
her new marriage. For instance, at one particular store, Mr.
Fawcett made attempts to visit petitioner at work during her
break and was strictly forbidden to do so.
petitioner worked in approximately 5 different PayLess store
locations in Oregon and Washington.
While employed with PayLess, petitioner was asked to work
long hours, due to understaffing of employees at a given store,
and in different departments within a given store. As a result,
petitioner felt rushed * * * and pushed in every direction.
Petitioner continued to work in this chaotic environment because
she desired a promotion. However, petitioner never received a
promotion from PayLess.
During this time, petitioner complained of chest pains, lack
of sleep due to her work schedule,
1
and nightmares about her work
environment, and experienced anxiety in both her professional
life and personal life.
2

In October 1993, while petitioner was still employed by
PayLess, she received a notice (class action notice) from B.
Newal Squyers, Esq. and Debra K. Ellers, Esq. of Holland & Hart,
Attorneys for Plaintiffs, notifying her of an Unpaid Overtime
Compensation Law Suit filed against PayLess. This class action
lawsuit was described as follows: - 4 -
On March 16, 1993, Laurie Sievers, Roy Menges, Twila
Kelly and Allen Burgess brought this suit against
PayLess in the United States District Court for the
District of Idaho, Case No. CV 93-0089-S-HLR, alleging
that they were employed by PayLess as salaried
employees with titles such as floor manager, floor
supervisor, senior supervisor, supervisor,
supervisor 2" and were required to perform clerking,
stocking or other tasks in excess of forty hours per
week without being compensated overtime work.
Plaintiffs bring this action and allege that PayLess
violated the Fair Labor Standards Act of 1938 U.S.C. §§
201-208. Plaintiffs seek compensation for unpaid
overtime, liquidated damages, attorney fees and costs.
The class of plaintiffs in the class action consisted of 267
employees of PayLess, including petitioner, who joined on October
27, 1993. On April 14, 1994, petitioner privately met with
plaintiffs attorney, Kurt Holzer (Mr. Holzer) in Tacoma,
Washington, to inform Mr. Holzer of her personal injuries, in
addition to those alleged in the class action lawsuit complaint.
Petitioner was informed at this meeting that the class action
case was under mediation and a jury trial was not likely.
Petitioner was also informed that approximately 30 class members
were deposed and allegedly suffered a number of injuries during
their employment with PayLess, including emotional distress and
physical injuries, and that her alleged injuries were experienced
by other class members. Petitioner did not submit any medical
bills to Mr. Holzer or provide the same to the Court.
The class action complaint requested relief for unpaid
overtime compensation and liquidated damages in an amount equal - 5 -
to the unpaid overtime compensation under section 16(b) of the
Fair Labor Standards Act of 1938 (FLSA), ch. 676, 52 Stat. 1069,
currently codified at 29 U.S.C. section 216 (1994), and
attorneys fees and costs. The complaint was never amended
during any time relevant to the class action lawsuit.
On January 25, 1995, an Order approving the settlement of
the class action lawsuit was signed by Larry M. Boyle, United
States Magistrate Judge. The Settlement Agreement and Release
(Settlement Agreement) states:
3.
Release of PayLess by the Plaintiffs
In exchange for the payment of the amount set forth in
paragraph 7 below, and in consideration of the mutual
promises and covenants contained in this Settlement
Agreement, the Named Plaintiffs on behalf of themselves
and the Individual Plaintiffs, upon the signing by each
Individual Plaintiff of the release required by
paragraph 9(b) of this document, hereby release and
discharge PayLess, Thrifty Payless, Inc., their
parents, agents and assigns from all actions, claims,
or demands for damages, liabilities, costs, or
expenses, which the Plaintiffs, individually or
collectively, have against PayLess on account of, or in
any way arising out the claims that were asserted or
that could have been asserted in the Lawsuit by the
Plaintiffs, which Lawsuit is hereby acknowledged as not
fully plead, further including, but not limited to,
claims for personal injuries, intentional infliction of
emotional distress, negligent infliction of emotional
distress, and from all known claims, whether based on
tort, statute or contract, which are based in whole or
in part, or arise out of, or in any way relate to: (1)
the Lawsuit; and (2) anything done or allegedly done by
PayLess arising out of, or in conjunction with or
relating to, the employment of any and/or all
Plaintiffs prior to November 1, 1992 by PayLess.
*
*
*
*
*
*
* - 6 -
8.
Liability Denied and Basis for Settlement
PayLess denies any liability on its part and enters
into this agreement solely to avoid litigation and to
buy its peace. All Settlement Proceeds are paid to
Plaintiffs on account of personal injuries. * * * None
of the provisions of this Settlement Agreement and
nothing contained in this Settlement Agreement shall be
construed as an admission of any liability whatsoever
by any party hereto to any other party hereto.
[Emphasis added.]
A total of $5 million was paid by PayLess to the class in
consideration of the Settlement Agreement. Specifically,
petitioner received $20,033.58 from Holland & Hart as her Net
Cash Recovery from the settlement. Petitioners portion of
attorneys fees and costs, approximately $10,565, was retained by
Holland & Hart.
Petitioners timely filed their joint Federal income tax
return for the taxable year 1995. They did not report any
portion of the settlement proceeds on their return, nor did they
claim a corresponding deduction for attorneys fees or costs.
In the notice of deficiency, respondent determined that
petitioners failed to include in gross income the settlement
proceeds of $30,599, of which $9,895 is wages subject to
employment tax, and that petitioner is allowed a Schedule A
deduction for attorneys fees, which was not claimed on the
original return.
Petitioners contend that the settlement proceeds were paid
to petitioner to settle claims for personal injury and
intentional infliction of emotional distress; therefore, the - 7 -
settlement award of $30,599 is excludable from income under
section 104(a)(2).
Section 61 broadly defines gross income to include all
income from whatever source derived, except as otherwise
provided. Statutory exclusions from income are narrowly
construed. Commissioner v. Schleier, 515 U.S. 323, 328 (1995).
Section 104(a)(2) provides that gross income does not
include the amount of any damages received (whether by suit or
by agreement * * * ) on account of personal injuries or
sickness. Section 1.104-1(c), Income Tax Regs., provides that
the term damages received means an amount received (other than
workmens c