Payment to a whistleblower for retaliation against him was includable in income as humiliation and isolation and did not constitute physical injury.

WHAT HAPPENED?

Bryant and Melanie Tillman-Kelly, challenge the Internal Revenue Service's (IRS) determination of a deficiency of $67,322 in their 2017 federal income tax.1 Mr. Tillman-Kelly received $230,671 to settle an Illinois state court action against Chicago State University (CSU), its board of trustees, and Dr. Justin Akujieze (Defendants) in 2017. Mr. Tillman-Kelly alleged that the Defendants had retaliated against him for reporting the misuse of grant funds, resulting in "emotional distress, humiliation, and lost income."

WHAT THE TAX COURT HELD IN TILLMAN v COMMISSIONER OF INTERNAL REVENUE  (TC Memo 2022-111)

In TC Memo 2022-111, the Tax Court held that the settlement payment (for emotional distress) is not excludable from Mr. Tillman-Kelly’s gross income under section 104(a)(2) for tax year 2017.  The Tax Court accordingly sustained the IRS’s deficiency determination, subject to the Commissioner’s concessions. To reflect the foregoing, Decision was entered for respondent ( the Commissioner of Internal Revenue) as to the deficiency and for petitioners as to the accuracy-related penalty under section 6662(a)".

KEY POINTS IN THE DECISION

• In footnote 5, the Tax Court noted that flush language to the text of IRC Section 104(a) provides that the general rule against exclusion of emotional-distress damages does not apply to "the amount paid for medical care" attributable to emotional distress. The Tillman-Kellys neither raised this issue nor introduced evidence regarding amounts for any medical care.
• In footnote 6, the Tax Court  noted that during his deposition in the state court litigation, Mr. Tillman-Kelly referenced a hospital visit in August 2010 in response to panic attacks. According to Mr. Tillman-Kelly's own testimony, however, the hospital sent him home because "physically nothing was wrong with [him]."

BRYANT D. TILLMAN-KELLY AND MELANIE TILLMAN-KELLY, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

United States Tax Court. Docket No. 6127-20

TC MEMO 2022-111

Filed November 21, 2022.

The Tillman-Kellys were Pro Se.