Louis A. & Patricia M. Chighisola v. Commissioner of Revenue (September 26, 2016)

COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD

LOUIS A. & PATRICIA M.		v.		COMMISSIONER OF REVENUE
CHIGHISOLA

Docket No. C319142					Promulgated:
								September 26, 2016

This is an appeal filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 62C, § 39, from the refusal of the Commissioner of Revenue ("appellee" or "Commissioner"), to abate personal income tax, interest, and penalties assessed to the appellants, Louis A. and Patricia M. Chighisola (together, "appellants"), for the tax year ended December 31, 2005 ("tax year at issue").
Commissioner Scharaffa heard this appeal and was joined by Chairman Hammond and Commissioners Rose, Chmielinski, and Good in the Decision for the appellee.
These findings of fact and report are made pursuant to a request by the appellants under G.L. c. 58A, § 13 and 831 CMR 1.32.
Louis A. and Patricia M. Chighisola, pro se, for the appellants.

Keri E. Angus, Esq., and Julie A. Flynn, Esq. for the appellee.


FINDINGS OF FACT AND REPORT

On the basis of the exhibits and testimony offered into evidence at the hearing of this appeal, the Appellate Tax Board ("Board") made the following findings of fact.
At all times relevant to this appeal, the appellants were Massachusetts residents and were required to file a resident income tax return. The pertinent jurisdictional facts for the tax year at issue are as follows.
On July 13, 2006, the appellants filed their tax return for the tax year at issue. The Commissioner issued to the appellants a Notice of Intent to Assess dated December 26, 2009.  The appellants requested a pre-assessment conference with the Commissioner's Office of Appeals ("Office of Appeals"), which was held on February 24, 2010.   After concluding that the assessment was correct, the Office of Appeals issued a Letter of Determination on March 4, 2010.  The Commissioner issued a Notice of Assessment dated March 16, 2010, assessing to the appellants additional tax, interest, and penalties in the total amount of $40,058.81.    The basis of the assessment was income received by the appellants, but not included on their tax return, stemming from the settlement of a lawsuit filed by Mr. Chighisola.  
On July 13, 2010, the appellants filed a timely Application for Abatement, which the Commissioner denied by a Notice of Abatement Determination dated March 7, 2013.  The appellants filed their Petition Under Formal Procedure with the Board for the tax year at issue on May 1, 2013. Based on these facts, the Board found and ruled that it had jurisdiction to hear and decide this appeal.  
	Mr. Chighisola was employed as a civil engineer for the Massachusetts Highway Department from 1976 until 1997. During the course of a construction project in Plymouth, an employee of P.A. Landers, the private construction company hired to work on the project, alleged that Mr. Chighisola attempted to solicit bribes from P.A. Landers in connection with the Plymouth project as well as a separate road project in Bridgewater.  As a result of this allegation, Mr. Chighisola was terminated from his employment.  
	Following his termination, Mr. Chighisola filed a defamation suit against P.A. Landers in Plymouth Superior Court.  The jury ruled in his favor and awarded damages in the amount of $425,000 in late 2004.  Mr. Chighisola appealed the verdict.  In early 2005, Mr. Chighisola and P.A. Landers reached a settlement in the amount of $550,000, releasing P.A. Landers and its agents from "all claims."
	The appellants filed their tax return for the tax year at issue. They paid tax on $53,212, the amount which was interest income on the $550,000 settlement, but did not otherwise report the settlement as income on their return.  
	It was the appellants' position in this appeal that the Commissioner's assessment was incorrect.  First, they argued that the $180,000 contingent fee paid to their attorney from the settlement funds should not be included in income. In addition, they asserted that approximately $110,000 of the settlement was meant to compensate for "lost retirement," and as such it should not have been included as income.  The basis for this claim was the allocation on the jury slip from the original jury award of $425,000.  The appellants did not dispute that the remainder of the settlement award was properly includible as Massachusetts taxable income, although they did argue that the additional penalties were not appropriate because of their lack of familiarity with the taxation of settlements.  
	It was the Commissioner's position that no portion of the settlement amount was excludable from gross income under the relevant provisions of the Internal Revenue Code ("Code") or Massachusetts law, and accordingly, the entire amount was properly includable in the appellants' gross income.  The Board agreed with the Commissioner and rejected all of the appellants' claims. 
	  As discussed further in the Opinion below, amounts received from a lawsuit or settlement thereof are generally includible in gross income, with certain limited exceptions.  One of those exceptions is for settlement or damages awarded to compensate for personal injury or sickness.  The lawsuit filed by Mr. Chighisola did not involve claims of personal injury or sickness, and thus the Board found that this exclusion did not apply.  
	With respect to the appellants' claim that a portion of the settlement was meant to compensate for Mr. Chighisola's lost retirement income, the Board found and ruled that this argument, too, was without merit.  General Laws c. 62, § 2(a)(2)(E) allows income received from a contributory retirement system to which an employee has contributed to be excluded from income.  Here, there was no indication that the appellants contributed any portion of the settlement amount into a contributory retirement fund, and thus it was not income from a contributory retirement fund of the Commonwealth to which the appellants contributed.
	The Board likewise concluded that the attorney's fees were not excludable from income.  Under Code §§ 62(a) (20) and 62(e) (18) ("§§ 62(a) (20) and  62(e) (18)"), taxpayers may exclude from gross income the amount of attorney's fees paid in connection with a claim of unlawful discrimination, that is, a claim filed in connection with the enforcement of civil rights or arising from an employment relationship. Mr. Chighisola's lawsuit against P.A. Landers did not involve the enforcement of civil rights, and since Mr. Chighisola was not employed by P.A. Landers, it did not involve an employment relationship. Therefore, the Board found and ruled that the fees were properly included in the appellants' gross income.
	Lastly, the appellants requested an abatement of the penalties imposed, citing their lack of familiarity with the taxation of money received through a settlement as grounds for the abatement.  As discussed more fully in the Opinion below, the Board found that the appellants failed to establish that their inaccurate reporting of income resulted from reasonable cause and not willful neglect.  Accordingly the Board concluded that they were not entitled to an abatement of the penalties.  
	In conclusion, on the basis of all of the evidence, the Board found and ruled that the appellants failed to demonstrate their entitlement to an abatement, and accordingly it issued a decision for the appellee in this appeal. 
 

OPINION

	For Massachusetts income tax purposes, "[r]esidents shall be taxed on their taxable income."  G.L. c. 62, § 4.  The starting point for determining Massachusetts taxable income is "federal gross income" with certain modifications not here relevant.  G.L. c. 62, § 2.  Federal gross income is defined as "all income from whatever source derived, including. . . (1) [c]ompensation for services . . . [and] (2) [] income derived from business . . . [.]"  26 U.S.C. § 61(a)(1) and (2).  The United States Supreme Court has held that this definition is to be given liberal construction, Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430 (1955), and it has been interpreted to include money received as the result of a lawsuit or settlement thereof.  See Commissioner v. Banks, 543 U.S. 426, 438 (2005).  
	While it is well established that the phrase "gross income" is to be broadly construed, it is equally well established that exclusions from income are to be narrowly construed. See Commissioner v. Jacobson, 336 U.S. 28, 49 (1949); U.S. v. Centennial Savings Bank, 499 U.S. 573, 583-84 (1991). A taxpayer claiming an exclusion from income bears the burden of proving that his claim falls within an exclusionary provision of the Code. See Anderson v. Commissioner, 38 T.C.M. 1206, 1208 (1979). While there are limited circumstances in which money, or a portion thereof, received as damages from a lawsuit or a settlement may be excluded from gross income, the Board found and ruled that none of them were present here.  
	The appellants did not allege, nor was there evidence to support the conclusion, that the lawsuit giving rise to the settlement at issue involved a claim of personal physical injury or sickness.  Thus, the exclusion found at § 104 (a)(2) of the Code was not applicable.  See 26 U.S.C. § 104 (a) (2).   
Further, while the appellants advanced several arguments as to why the portion of the settlement paid to their attorney as a contingent fee was not includable in their gross income, their arguments were unavailing.  First, they argued that the contingent fee was deductible because it related to the production of income. Under § 212 of the Code, attorney's fees are deductible if the underlying cause of action is related to the production of income. See 26 U.S.C. § 212(1). However, Massachusetts does not recognize this section of the Code.  Therefore, § 212 was not applicable in the instant appeal. See Lavorante v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2012-1149, 1155.    
	Code §§ 62(a) (20) and 62(e) (18), which allow for the exclusion of attorney's fees in cases involving unlawful discrimination, are also inapplicable in the present appeal.  Unlawful discrimination is defined as an action involving the "enforcement of civil rights" or regulating "the employment relationship."  See 26 U.S.C. §§ 62(a) (20) and § 62(e) (18).  Here, there was no indication in the record that the settlement at issue arose from a claim involving the enforcement of civil rights, and Mr. Chighisola was not employed by the defendant, P.A. Landers.  Thus the Board found and ruled that §§ 62(a) (20) and § 62(e) (18) did not apply in the present appeal.  Id. 
	Additionally, the appellants argued that a portion of the settlement which was meant to compensate for Mr. Chighisola's lost state retirement income should be excluded from gross income.  General Laws c. 62, § 2(a)(2)(E) allows for an exemption from gross income for any "income ... from any contributory ... pension ... or retirement fund ... of the commonwealth ... to which the employee has contributed." Thus, Massachusetts exempts from state taxation any benefits received from a contributory state retirement system.  See Filios v. Commissioner of Revenue, 415 Mass. 806, 812 (1993).  In Filios, the Massachusetts Supreme Judicial Court held that distributions from military non-contributory pensions are subject to taxation and are not excludable from Massachusetts taxable income under G.L. c. 62, § 2(a)(2)(E). Id. at 812.  The Court explained that the basis for the exclusion for contributory retirement plans is that the income was previously includable in the taxpayer's gross income, and inclusion of the benefits received from a contributory retirement pension plan would result in double taxation.   Id.   Mr. Chighisola did not contribute any of the settlement award to the state retirement system, nor was it previously included in his gross income. Thus, the Board found and ruled that even if a portion of the settlement was granted to compensate for lost retirement, it was not eligible for exclusion because it was not income from a contributory retirement fund of the Commonwealth to which Mr. Chighisola contributed.   
	Finally, the appellants challenged the Commissioner's imposition of penalties under G.L. c. 62, § 33 ("§ 33").  As grounds for abatement of the penalties, the appellants asserted that they were completely unfamiliar with the provisions of the Code and Massachusetts law regarding the taxation of settlements.  Penalties assessed under § 33 may be abated, in whole or in part, if it is shown that the tardiness or deficiency in payment "is due to reasonable cause and not due to willful neglect[.]"  G.L. c. 62, § 33.  A taxpayer may demonstrate reasonable cause by showing that he "exercised the degree of care that an ordinary taxpayer in his position would have exercised," Commissioner of Revenue v. Wells Yachts South, Inc., 406 Mass. 661, 665 (1990), including, but not limited to, seeking the advice of a competent tax professional and disclosing all of the relevant information to that professional.  See Samia v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1993-127, 133.  A taxpayer's lack of familiarity with the law, without more, does not establish reasonable cause for an abatement of the penalties.  See Stephen H. Cohen, D.M.D., P.C. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports at 1998-855, 859. Here, the appellants offered no evidence that they attempted to familiarize themselves with the taxability of settlements or that they sought the advice of a competent tax professional.  As the appellants offered no evidence or arguments other than their own lack of familiarity with the law, the Board found and ruled that they did not establish that their failure to remit the proper tax was due to reasonable cause and not due to willful neglect.
	

In conclusion, on the basis of all of the evidence, the Board found and ruled that the appellants failed to meet their burden of demonstrating their entitlement to an abatement.  Accordingly, the Board issued a decision for the appellee in this appeal.  

						   THE APPELLATE TAX BOARD




By: ________________________________
Thomas W. Hammond, Jr., Chairman

A true copy,
Attest: _____________________________
		 Clerk of the Board.

 Under G.L. c. 62C, § 26(b)(1), the Commissioner has three years from the date a tax return was filed or required to be filed, whichever is later, to make an additional assessment of tax. Although the timeliness and validity of the assessment in the present appeal were not addressed by either party, the Board notes that the assessment appears to have been timely under the provisions of G.L. c. 62C, § 26(h), which provides for a longer period of six years for an assessment when the gross income properly reportable exceeds the gross income reported by the taxpayer by at least 25%, as was the case here. 
 Following the filing of the appellants' appeal with the Board, the Commissioner granted a partial abatement in the amount of $2,820.00 after concluding that the appellants had paid taxes on the interest attributable to the settlement award.  

ATB 2016-384