Fred and Mary Gillette v. Commissioner., United States Tax Court - Memorandum Decision, T.C. Memo. 1997-301, Docket No. 1423-96., Filed June 30, 1997

Fred and Mary Gillette v. Commissioner.

United States Tax Court - Memorandum Decision

T.C. Memo. 1997-301

Docket No. 1423-96.

Filed June 30, 1997.

Fred Gillette and Mary Gillette, pro sese. Mark A. Weiner, for the respondent.

MEMORANDUM OPINION

FOLEY, Judge: By notice dated December 6, 1995, respondent determined a deficiency in petitioners' 1992 Federal income tax of $40,513 and an accuracy-related penalty of $8,103. After concessions, the issues we must decide are as follows:

1. Whether petitioners, pursuant to section 104(a)(2), are entitled to exclude amounts received in settlement of a class action suit. We hold they are not.

2. Whether petitioners, pursuant to section 6662(a), are liable for an accuracy-related penalty. We hold that they are liable.

Unless otherwise indicated, all section references are to the Internal Revenue Code as in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

Background

The facts have been fully stipulated under Rule 122 and are so found. At the time the petition was filed, petitioners resided in Bakersfield, California.

On June 1, 1979, a class action suit against State Farm General Insurance Co., State Farm Mutual Automobile Insurance Co., State Farm Life Insurance Co., and State Farm Fire and Casualty Co. (State Farm) was filed in the U.S. District Court for the Northern District of California, Kraszewski v. State Farm Gen. Ins. Co. The plaintiffs alleged that State Farm, in violation of title VII of the Civil Rights Act of 1964 (Title VII), had discriminated against women in the hiring of its insurance agents. On November 6, 1981, the District Court bifurcated the litigation into a liability and a remedy phase.

On April 29, 1985, the District Court ruled in the liability phase that State Farm was liable under Title VII for classwide discrimination on the basis of sex. Specifically, it ruled that women who attempted to become trainee agents were "lied to, misinformed, and discouraged in their efforts to obtain the entry level sales position." The court found State Farm liable with respect to "all female applicants and deterred applicants who, at any time since July 5, 1974, have been, are, or will be denied recruitment, selection and/or hire as trainee agents by defendant companies within the State of California."

Mary Gillette was a member of the class action suit and prevailed in her claim. As a result, in 1992 State Farm issued petitioner and her attorney a $155,888 check. Petitioner's attorney retained legal fees of $31,226, and the balance was paid to petitioner. None of the $155,888 amount was reported or disclosed on petitioners' return. Respondent determined that the entire $155,888 should have been included in petitioners' gross income.

Discussion

I. Excludability of Settlement Proceeds Under Section 104(a)(2)

This case requires the Court to revisit the taxability of the proceeds received by a claimant who was a member of the class of plaintiffs in Kraszewski v. State Farm Gen. Ins. Co. In each of our prior cases, we held that none of the proceeds were excludable from the taxpayer's gross income. See Hayes v. Commissioner [Dec. 52,032(M)], T.C. Memo. 1997-213; Hardin v. Commissioner [Dec. 52,021(M)], T.C. Memo. 1997-202; Raney v. Commissioner [Dec. 52,109(M)], T.C. Memo. 1997-200; Clark v. Commissioner [Dec. 51,968(M)], T.C. Memo. 1997-156; Berst v. Commissioner [Dec. 51,945(M)], T.C. Memo. 1997-137; Martinez v. Commissioner [Dec. 51,934(M)], T.C. Memo. 1997-126; Fredrickson v. Commissioner [Dec. 51,933(M)], T.C. Memo. 1997-125. Petitioner has presented no new facts or contentions. Accordingly, we sustain respondent's determination that the $155,888 is not excludable under section 104(a)(2).

II. Accuracy-Related Penalty

Section 6662 imposes an accuracy-related penalty where there is a substantial understatement of income tax. Respondent determined that the penalty applies, and petitioners bear the burden of proving otherwise. Rule 142(a). Petitioners have not advanced any contention relating to this issue. As a result, we conclude that petitioners are liable for the penalty.

We have considered all other arguments made by the parties and found them to be either irrelevant or without merit.

To reflect the foregoing,

Decision will be entered under Rule 155.

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