Amos v. Comm'r
2003 Tax Ct. Memo LEXIS 330, 2003 T.C. Memo. 329, 86 T.C.M. 663 (2003)
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Rule of Law:
When a settlement agreement resolves claims for both excludable personal physical injuries and other non-excludable claims (e.g., confidentiality), and the agreement does not allocate the payment, the court must determine the payor's dominant reason for the payment and allocate the proceeds between the taxable and non-taxable portions.
Facts:
- On January 15, 1997, Eugene Amos, Jr., a television cameraman, was operating a camera at a professional basketball game.
- During the game, Chicago Bulls player Dennis Keith Rodman landed near a group of photographers, twisted his ankle, and then kicked Amos in the groin area.
- Immediately following the incident, Amos was taken to a medical center where he complained of shooting neck pain and was observed to be limping.
- Amos hired an attorney, Gale Pearson, to represent him and also filed a police report with the Minneapolis Police Department claiming Rodman had assaulted him.
- On January 16, 1997, Amos sought additional medical treatment at a VA Medical Center for his back and groin.
- On January 21, 1997, just six days after the incident, Amos and Rodman executed a confidential settlement agreement in which Rodman agreed to pay Amos $200,000.
- The agreement released Rodman from all claims arising from the incident, including physical injuries, but also required Amos to maintain confidentiality, not disparage Rodman, not publicize facts about the incident, and not cooperate in any criminal investigation against Rodman.
Procedural Posture:
- Eugene Amos, Jr. received a $200,000 settlement from Dennis Rodman in 1997.
- Amos excluded the entire $200,000 from his gross income on his 1997 federal income tax return.
- The Commissioner of Internal Revenue (respondent) issued a notice of deficiency to Amos (petitioner), determining that the settlement was taxable income and asserting a tax deficiency of $61,668.
- Amos filed a petition with the United States Tax Court (the court of first instance for this matter) seeking a redetermination of the deficiency asserted by the Commissioner.
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Issue:
Is the entire $200,000 settlement amount that Eugene Amos, Jr. received excludable from his gross income under I.R.C. § 104(a)(2) as damages received on account of personal physical injuries?
Opinions:
Majority - Judge Chiechi
No, the entire $200,000 settlement amount is not excludable from gross income because a portion of the payment was made in consideration for non-physical injury provisions within the settlement agreement. Under § 104(a)(2), only amounts received on account of personal physical injuries or physical sickness are excludable. The court determined that while Rodman's dominant reason for the payment was Amos's claimed physical injuries, the settlement agreement also contained valuable provisions unrelated to those injuries. These included clauses for confidentiality, non-disparagement, and non-cooperation with criminal proceedings. Because the agreement did not allocate the settlement amount, the court must do so. Based on the record, the court allocated $120,000 of the payment to the excludable physical injury claims and $80,000 to the taxable non-physical injury provisions.
Analysis:
This case demonstrates the critical importance of allocation language in settlement agreements for tax purposes. It establishes that even if the primary reason for a settlement is a physical injury, the inclusion of other valuable considerations, such as confidentiality or non-disparagement clauses, can render a portion of the settlement proceeds taxable. The court's willingness to look beyond the payor's 'dominant reason' and assign independent value to these non-physical covenants sets a precedent for how mixed-claim settlements are analyzed. This decision incentivizes parties to negotiate and expressly state in their agreements how settlement funds are allocated to avoid having a court impose its own allocation, which may be unfavorable to the taxpayer.
