Barbato, TC Memo 2016-23
The Tax Court has held that a taxpayer who incurred a job-related injury, and then was awarded damages by the Equal Employment Opportunity Commission for her emotional distress because her employer discriminated against her, did not meet the Code Sec. 104(a)(2) requirements for excluding damage awards from gross income. Click here for the Opinion of the Court.
Background. Code Sec. 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. (Code Sec. 104(a)) But “damages for emotional distress attributable to a physical injury or physical sickness are excluded from income under Code Sec. 104(a)(2).” (Reg. § 1.104-1(c))
Facts. Ms. Barbato had been a U.S. Postal Service (USPS) letter carrier. In ’91 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 a new USPS position in which she did not actually carry mail but rather worked at the station answering telephones, helping at the window, etc.
In 2004, a newly appointed station manage 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.
Ms. Barbato then filed complaints against USPS with the Equal Employment Opportunity Commission (EEOC).
The EEOC administrative judge ruled that Ms. Barbato was “entitled to non-pecuniary damages in the amount of $70,000, for the emotional distress which she established was proximately caused by the discrimination” of USPS’ employees against her. The judge stated that Ms. Barbato suffered from depression, anxiety, sleep problems, and post-traumatic stress disorder, and that the conditions were caused by and/or exacerbated by the actions which were found to be discriminatory.
However, the judge 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 occurred during the same time period that the discriminatory actions were also taking place.” He also noted that, had 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 in non-pecuniary compensatory damages.
USPS paid Ms. Barbato $70,000 in damages in 2011. Ms. Barbato did not report the $70,000 on her 2011 tax return.
The Court says the damages were taxable. The Tax Court sided with IRS and found that the damages did not fit within the exclusion provided in Code Sec. 104(a)(2) and thus were taxable.
The Court said that the EEOC decision was clear that the damages USPS paid to Ms. Barbato were for emotional distress attributable to discrimination. 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 stated that Ms. Barbato’s “significant physical distress and pain” “were exacerbated by non-discriminatory actions.” And, the judge noted that, had 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 in non-pecuniary compensatory damages. These statements made clear that the damages were for emotional distress attributable to discrimination.