Domeny v. Commissioner U.S. Tax Ct. T.C. Memo

2010-9 (2010)

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Nature of the Case

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Facts

P was employed by the Pacific Autism Center for Education (PACE) in 2000. During 1996 before her employment with PACE, P was diagnosed with multiple sclerosis (MS). At the onset of her MS, she experienced numbness from the waist down. The numbness receded to her feet, leaving them numb. She also experienced fatigue, lightheadedness, vertigo, and sometimes a burning sensation behind her eyes. P found the prescribed treatment (which did not ameliorate the symptoms of her condition) more profoundly troublesome than her symptoms, so she chose to 'manage' her symptoms without medication. She left her position as a professional fundraiser before being hired by PACE because she was seeking a job situation where she would not have to spend as much time on her feet. By 2004, what P described as a hostile work environment caused her MS symptoms to flare up. P felt tension concerning her supervisor's alleged embezzlement, which P reported to the Board. In particular, she was upset that PACE sent her out to raise funds from parents, knowing that funds were being embezzled by her supervisor. P's doctor told her she should not return to work until after March 21, 2005. P notified PACE and received a telephone call that her employment would be terminated effective March 15, 2005. After that telephone conversation petitioner's physical MS symptoms were 'spiking,' including shooting pain up her legs, fatigue, burning eyes, spinning head, vertigo, and lightheadedness. P's lawyer negotiated with PACE lawyers, and a settlement was reached. Under the agreement, $33,308 was the total amount PACE agreed to pay. Of the $33,308, $ 8,187.50 was compensation due to petitioner, which PACE agreed to send directly to petitioner's attorney. Petitioner reported the $8,187.50 on her 2005 Federal income tax return as wage compensation. Another $8,187.50 was sent directly to petitioner's attorney, and petitioner was not issued a Form 1099-MISC, Miscellaneous Income, or Form W-2, Wage and Tax Statement, by PACE for that amount. PACE paid the remaining $16,933 to petitioner without withholding deductions and issued a Form 1099-MISC reflecting that the amount was 'Nonemployee compensation'. P's understanding that the money was to compensate her for physical injuries that occurred in a hostile work environment which PACE allowed to exist over an extended time. Petitioner's intense MS symptoms, which occurred during her PACE employment, prevented her from working until sometime in 2006. D determined that the $16,933 was not made on account of her physical condition in that the agreement released all kinds of claims and was ambiguous regarding any specific reasons for payment and as such, it was gross income.