Fernando Ponce & Natalie Ponce ( 2023 )

United States Tax Court
T.C. Summary Opinion 2023-23FERNANDO PONCE AND NATALIE PONCE,
Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 24985-21S. Filed July 18, 2023.
—————
Christina Weed, for petitioners.
Melody Morales, for respondent.
SUMMARY OPINION
PANUTHOS, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue Code in effect
when the petition was filed. Pursuant to section 7463(b), 1 the decision
to be entered is not reviewable by any other court, and this opinion shall
not be treated as precedent for any other case.
In a notice of deficiency dated July 6, 2021, respondent
determined a deficiency in petitioners’ federal income tax of $3,962 for
taxable year 2018 (year in issue).
1 Unless otherwise indicated, statutory references are to the Internal Revenue
Code, Title 26 U.S.C., in effect at all relevant times, and Rule references are to the Tax
Court Rules of Practice and Procedure.
Served 07/18/23
2
After concessions, 2 the issue for decision is whether a payment of
$15,000 received by petitioner Fernando Ponce (petitioner) from the
settlement of a lawsuit is includible in petitioners’ income for the year
in issue.
Background
Some of the facts have been stipulated and are so found. We
incorporate the Stipulation of Facts and attached Exhibits by this
reference. The record consists of the Stipulation of Facts with attached
Exhibits and the testimony of Fernando Ponce. Petitioners resided in
California when the Petition was timely filed.
Petitioner worked as a sales associate at Diamond Wireless, LLC,
selling cellphones, cellphone plans, and accessories between 2008 and
2010. Petitioner was paid a salary and commissions, which could vary
from $100 to $800 per day. From 2012 to 2017 petitioner participated
in a class action lawsuit, Harmon v. Diamond Wireless LLC, No. 34-
2012-00118898 (Cal. Super. Ct. filed Feb. 17, 2012) for wage and hour
claims against his employer in the Superior Court of the State of
California. Petitioner was a lead plaintiff in the case.
As a lead plaintiff, petitioner took time off from work and incurred
some expenses in pursuing the claim. According to settlement
documents, petitioner was paid $15,000 as a “service award” for his
settlement efforts in litigating the wage and hours claim against
Diamond Wireless. The settlement documents also indicated that the
payment was made to reasonably compensate petitioner for the efforts
he made and the risks he took in filing and prosecuting the action. The
payment was made to petitioner through a qualified settlement fund,
Diamond Wireless QSF.
Petitioners timely filed a joint Form 1040, U.S. Individual Income
Tax Return, for the year in issue. The return did not include the $15,000
received from Diamond Wireless QSF. Diamond Wireless QSF reported
to the Internal Revenue Service that petitioner had received $15,000 in
nonemployee compensation. Petitioners’ return was selected for audit
for the year in issue.
2 Petitioners conceded $450 of taxable wages attributable to Diamond Wireless
QSF, $693 of a state income tax refund, $450 of other income, and $30 of interest for
tax year 2018.
3
Discussion
I. Burden of Proof
Generally, the Commissioner’s determination in a notice of
deficiency is presumed correct, and the taxpayers bear the burden of
proving that the determination is erroneous. See Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). 3
Petitioners do not dispute the amount reported by Diamond
Wireless QSF nor their receipt of the amount reported. They assert only
that the amount received as a service award was reimbursement and
therefore not taxable. Accordingly, respondent’s determination of
unreported income is presumed correct, and petitioners have the burden
of proving that the determination is erroneous.
II. Unreported Income
Gross income includes “all income from whatever source derived.”
§ 61(a). Payments that are “undeniable accessions to wealth, clearly
realized, and over which the taxpayers have complete dominion” are
taxable as income unless an exclusion applies. Commissioner v.
Glenshaw Glass Co., 348 U.S. 426, 431 (1955).
Proceeds from settlement of litigation generally constitute gross
income unless a taxpayer proves that the proceeds fall within a specific
statutory exclusion. See Commissioner v. Schleier, 515 U.S. 323, 328–
37 (1995); Save v. Commissioner, T.C. Memo. 2009-209.
Generally, recovery of capital is not income. See United States v.
Safety Car Heating & Lighting Co., 297 U.S. 88, 98 (1936); Milenbach v.
Commissioner, 318 F.3d 924, 933 (9th Cir. 2003) (noting that proceeds
that represent compensation for lost value or capital generally are not
taxable), aff’g in part, rev’g in part 106 T.C. 184 (1996). Whether a
payment received in settlement of a claim represents a recovery of
capital depends on the nature of the claim that was the basis for the
settlement. See Spangler v. Commissioner, 323 F.2d 913, 916 (9th Cir.
1963), aff’g T.C. Memo. 1961-341.
3 Pursuant to section 7491(a), the burden of proof as to factual matters shifts
to the Commissioner under certain circumstances. Petitioners have neither alleged
that section 7491(a) applies nor established their compliance with its requirements.
Therefore, petitioners bear the burden of proof.
4
Petitioners assert that the service award received from the
settlement was reimbursement for expenses incurred during the
litigation process and constitutes a recovery of capital. Petitioner
testified that he traveled, took time off work, and regularly
communicated with law firms in pursuing the litigation. While we have
no doubt that petitioner incurred expenses in pursuing the class action
lawsuit, there is nothing in the record from which the Court could
estimate any expenses.
Additionally, petitioners offered up documents concerning the
Commissioner and another named plaintiff in the class action lawsuit.
The parties in that matter had resolved a discrepancy in the same tax
year in issue involving the same service award. Petitioners assert that
the other taxpayer’s service award was deemed excludable from gross
income and not taxable.
While we may give the Commissioner’s determinations involving
another taxpayer some consideration, we are not bound by them. See
Taproot Admin. Servs., Inc. v. Commissioner, 133 T.C. 202, 208–09
(2009), aff’d, 679 F.3d 1109 (9th Cir. 2012). Even if we were to consider
the documents concerning another taxpayer, the record does not support
petitioners’ assertion that the service award is nontaxable. The
documents concerning another taxpayer simply demonstrate the
Commissioner had proposed changes to his tax return for tax year 2018
and that a discrepancy had been resolved.
While we recognize that petitioner may have expended time and
money to pursue his claim, from the record before us we are unable to
conclude that the service award was a reimbursement for expenses
incurred in pursuing the lawsuit or that it is excludable from petitioners’
income. Even if we were to find that the service award represented
reimbursement for expenses, the record is vague and insufficient as to
the nature of expenditures petitioner made in support of the lawsuit.
Accordingly, respondent’s determination is sustained.
We have considered all of petitioners’ arguments, and, to the
extent not addressed herein, we conclude that they are moot, irrelevant,
or without merit.
To reflect the foregoing,
Decision will be entered for respondent.