In Arkow v. Commissioner of Internal Revenue, 2016 WL 7377286 (U.S. Tax Ct. 2016), Judge Vasquez held that a TCPA plaintiff failed to report taxable income on a $3,000 TCPA settlement.
In December 2011 petitioner husband filed a complaint against Wyndham in the Superior Court of California for Los Angeles, California, alleging violations of the Telephone Consumer Protection Act (TCPA), 47 U.S.C. sec. 227 (2012). The complaint did not allege any physical injuries. On February 8, 2012, petitioner husband and Wyndham entered into a settlement agreement wherein petitioner husband agreed to release all claims against Wyndham in exchange for $3,000. Petitioner husband received the $3,000 settlement in 2012. However, petitioners did not report the $3,000 as income on their 2012 return. Respondent issued petitioners a notice of deficiency determining that the $3,000 settlement constituted unreported gross income. Petitioners timely filed a petition with this Court for redetermination. For the reasons set forth below, we sustain respondent’s determination. . . . Section 104(a)(2) provides that gross income does not include “the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness”. In interpreting section 104(a)(2), the Supreme Court has held that damages are excludable from gross income where a taxpayer proves (1) that the underlying cause of action giving rise to the recovery is based on tort or tort-type rights and (2) that the damages were received on account of personal injuries or sickness (Schleier test).3 See Commissioner v. Schleier, 515 U.S. 323, 336–337 (1995). . . .As indicated above, we must first determine whether petitioners received damages within the meaning of section 104.4 See id.; see also sec. 1.104–1(c), Income Tax Regs. The regulations define the term “damages” as “an amount received (other than workers’ compensation) through prosecution of a legal suit or action, or through a settlement agreement entered into in lieu of prosecution.” Sec. 1.104–1(c), Income Tax Regs. Wyndham paid petitioner husband $3,000 pursuant to a settlement agreement to avoid the prosecution of petitioner husband’s TCPA claim. Under those circumstances, we find that the $3,000 settlement payment clearly meets the definition for damages because petitioner husband received an amount through a settlement agreement entered into in lieu of prosecution of a legal suit. . . We now turn to whether the $3,000 settlement payment was received on account of a personal physical injury or physical sickness. When damages are received pursuant to a settlement agreement, the nature of the claim that was the actual basis for settlement controls whether such amounts are excludable under section 104(a)(2). Burke, 504 U.S. at 237. The determination of the nature of the claim is a factual inquiry and is generally made by reference to the settlement agreement. Robinson v. Commissioner, 102 T.C. 116, 126 (1994), aff’d in part, rev’d in part on another issue, 70 F.3d 34 (5th Cir. 1995). If the settlement agreement lacks an express statement of what the settlement amount was paid to settle, we look to the intent of the payor, which we determine on the basis of all the facts and circumstances of the case, including the complaint filed and details surrounding the litigation. Knuckles v. Commissioner, 349 F.2d 610, 613 (10th Cir. 1965), aff’g T.C. Memo. 1964–33; Robinson v. Commissioner, 102 T.C. at 127. The settlement agreement contains no terms indicating that Wyndham issued the settlement payment on account of petitioner husband’s physical injuries or physical sickness. The terms of the agreement state only that petitioner husband released “any and all rights” and claims against Wyndham in exchange for $3,000. This general release does not specifically designate a portion of the settlement payment as a settlement on account of personal physical injury or physical sickness or otherwise make any allusion to compensation for a physical injury or physical sickness. Furthermore, at trial petitioner husband conceded that neither the settlement agreement nor the complaint referenced any physical injury suffered by him. Since the settlement agreement lacks an express statement of what the settlement payment was for, we next look to the intent of the payor to determine whether the settlement payment was on account of petitioner husband’s physical injuries or sickness. In the settlement agreement Wyndham explicitly states that the payment was a “full settlement” of petitioner husband’s claim. However, petitioner husband’s claim alleged only violations of the TCPA; it did not allege a personal physical injury or sickness. We observe that the TCPA was enacted to restrict the use of automated calls. The TCPA does not provide relief for physical injuries of sickness. Therefore, considering the purpose of the TCPA and the terms in the settlement agreement, we find that Wyndham did not intend to pay petitioner husband on account of a physical injury or sickness. Accordingly, we conclude that petitioners cannot exclude from income the settlement payment received from Wyndham.