SC Administrative Law Court Decisions

On March 28, 2002, a final order and decision was issued in the instant case in which several conclusions were reached. The order held that the South Carolina Department of Revenue (DOR) was not equitably estopped from claiming the settlement funds received by the taxpayer in 1997 were taxable. Likewise, the 1996 amendment to IRC § 104(a)(2) was held applicable to the taxpayer's 1997 tax year, and the funds received by the taxpayer in 1997 were not to be excluded from taxation under that statute. In addition, the portion of the taxpayer's funds that were paid to the taxpayer's attorney were to be included in the taxpayer's 1997 gross income. Further, the taxpayer was not liable for a penalty for filing a return that contained a substantial understatement of tax since that penalty should be waived. Finally, the taxpayer was found liable for interest on any unpaid income tax.

On April 9, 2002, the taxpayer filed a Motion for Reconsideration arguing that the order was in error. The allegation is that DOR was equitably estopped, the funds received by the taxpayer were received on account of personal physical injury or physical sickness, the portion of the taxpayer's funds paid to the taxpayer's attorney should not be included in the taxpayer's 1997 gross income, and interest should not be charged.

While I conclude that granting the Motion For Reconsideration is not required under the ALJD Rules, the motion is nonetheless granted and the positions raised by the taxpayer have been throughly reviewed. However, no changes are made to the final conclusions reached in the original March 28, 2002 and that order shall be supplemented by the instant order.

A Motion for Reconsideration must satisfy the requirements for reconsideration. Here, the taxpayer's motion fails to adequately set forth any of the grounds for which a motion for reconsideration can be granted under ALJD Rule 29(D) and Rule 60(B), SCRCP. The required grounds are as follows:

• mistake, inadvertence, surprise, or excusable neglect;
• newly discovered evidence which by due diligence could not have been discovered in time to move for a new trial under Rule 59(b);
• fraud, misrepresentation, or other misconduct of an adverse party;
• the judgment is void; or
• the judgment has been satisfied, released, or discharged, or a prior judgment upon which it is based has been reversed or otherwise vacated, or it is no longer equitable that the judgment should have prospective application.

"The movant in a Rule 60(b) motion has the burden of presenting evidence proving the facts essential to entitle him to relief." Bowers v. Bowers, 304 S.C. 65, 403 S.E.2d 127, 129 (Ct. App. 1991). Here, the motion does not establish any of the criteria listed.

No one asserts the decision was reached as the result of a party's mistake, inadvertence, surprise, or excusable neglect. Indeed, this case was well argued by extremely capable counsel and no suggestion can be found in the Motion for Reconsideration that mistake, inadvertence, surprise, or excusable neglect is attributable to any party. Thus, no basis exists for granting a reconsideration under ALJD Rule 29(D) and SCRCP 60(b)(1).

Further, as to 60(b)(2), no one asserts that the decision should be changed on the basis that newly discovered evidence has now come to light and that consideration of that evidence will require a different decision. Similarly, 60(b)(3) is not implicated since not a hint of an allegation can be found that the decision results from fraud, misrepresentation, or other misconduct of an adverse party. Quite the contrary, this case was well presented and all parties dealt with the controversy is a fair manner.

Additionally, as to 60(b)(4), clearly no basis exists to find the judgment is void since generally a judgment is void only when the decision is rendered by an adjudicator having no jurisdiction to render such a decision. Thomas & Howard Co. Inc. v T.W. Graham and Co., 318 S.C. 286, 457 S.E.2d 340 (1995). Here, jurisdiction is well established. See S.C. Code Ann. §§ 12-60-460 (Supp.2000), 1-23-310 et seq. (Supp.2000).

Further, nothing in the motions satisfy 60(b)(5). No support exists showing that the judgment has been satisfied, released, or discharged, or that a prior judgment upon which the current judgment is based has been reversed or otherwise vacated, or that it is no longer equitable that the judgment should have prospective application.

Finally, the parties must recognize that the five enumerated provisions of ALJD Rule 29(D) and SCRCP 60 do not authorize a party to reargue positions previously denied in the original order. See 2 AmJur 2d, Administrative Law § 393 ("A rehearing petition may not be used . . . to reargue issues determined by the challenged opinion."). In this case, the criteria of ALJD Rule 29(D) and SCRCP 60 are simply not met.

Notwithstanding the lack of a supportable basis requiring a reconsideration, I exercise my discretion and hereby grant the Motion For Reconsideration. However, the matter having been responded to by both parties, I find no additional argument or briefing is necessary or allowed.

Further, I recognize the careful thought and analysis expressed in the motion to reconsider. Accordingly, I have likewise chosen to give careful reconsideration to the taxpayer's stated grounds.

1. Equitable Estoppel

The taxpayer argues that since uncontradicted evidence was presented which showed the State through its attorney had assured the taxpayer that the settlement was nontaxable the ALJ relied too heavily upon the language of the settlement agreement which stated that no tax advice had been given. I find the taxpayer's argument presents an insufficient basis upon which to allow the application of equitable estoppel.

First, and in all events, estoppel cannot run against the state in this case since it is a tax collection case. Heyward v. South Carolina Tax Commission, 240 S.C. 347, 126 S.E.2d 15 (1962); Texaco, Inc. v. Wasson, 269 S.C. 255, 237 S.E.2d 75 (1977).

Second, even if estoppel were available, none was invoked by the purported oral assurances of non-taxability by the state's lawyers in the settlement of the dispute. Rather, statutory authority is granted to DOR to provide opinions on the taxability of proposed transactions. S.C. Code Ann § 12-4-320(2). Thus, even if the statements were made by the lawyers, the lawyers had no authority to bind the state to the taxability or nontaxability of the proceeds since officials with no authority cannot bind the state under an estoppel argument. Town of Sullivans Island v. Byrum, 306 S.C. 539, 544, 413 S.E.2d 325, 328 (Ct.App.1992).

Finally, deciding whether assurances of nontaxability were made to the taxpayer raised a fact question for which contradictory evidence was present. While the testimony from an interested witness explained that assurances of nontaxability were made, the same witness signed a document attesting that no such statements were not made. The written document is more credible since it was signed by parties who were adversaries in a negotiated settlement. Further, it was signed by the taxpayer even though signing was against her pecuniary interest. Thus, the more credible evidence supported the written conclusion.

2. Personal Physical Injury or Physical Sickness

The taxpayer argues the settlement damages must be excluded for a number of reasons all of which seek to establish that the payment to the taxpayer was due to physical injury or physical sickness.

a. Section 1983

The taxpayer argues that undue significance was given to the suit being an "employment discrimination" suit instead of a "Section 1983 action."

Here, the taxpayer's suit was unequivocally a claim of employment discrimination. She alleged she was injured through an employment relationship and that her employer discriminated against her because of her sex (COA 1), race (COA 2), and political affiliation (COA 3). Having asserted three causes of actions claiming employment discrimination, the taxpayer then needed a remedy to recover for the injuries inflicted. Section 1983 is simply a remedy, nothing more and nothing less. See Chapman v. Houston Welfare Rights Organization, 441 U.S. 600 (1979) ("it remains true that one cannot go into court and claim a 'violation of § 1983'--for § 1983 by itself does not protect anyone against anything. As Senator Edmunds recognized in the 1871 debate: 'All civil suits, as every lawyer understands, which this act authorizes, are not based upon it; they are based upon the right of the citizen; the act only gives a remedy.'").

The section 1983 remedy chosen does not add to or subtract from learning whether the personal injuries alleged are physical or non-physical. Rather, the legislative history explains that if the nature of the suit originates in a "claim of employment discrimination," the fact that emotional distress associated with the discrimination produced physical manifestations will not result in an exclusion for such. On the other hand, funds received for emotional distress would be excluded if the suit originated in an allegation of physical injury. Here, no physical injury is alleged in the suit that was settled and the fact that section 1983 was one of the remedies chosen does not warrant a finding that the payment was for physical injuries. Thus, no exclusion is available.

b. Personal Injury and Physical Injury

The taxpayer also argues that "personal injury" is synonymous with "physical injury." Since the settlement agreement identifies the payment as being for personal injuries and since witnesses in the legal profession testified that personal injury is a term meaning physical injury, the taxpayer argues persuasive evidence was overlooked establishing the meaning of physical injury. I cannot agree.

Both the litigation history and the legislative history of IRC § 104(a)(2) show a clear intention to separate physical injury from the total universe of personal injury. Indeed, a personal injury may be either physical or non-physical. The following from Greer v. United States, 207 F.3d. 322, 328 (6th Cir. 2000) makes the distinction clear for IRC § 104(a)(2):

Courts and the IRS have long recognized that § 104(a)(2)'s reference to personal injuries "encompasses ... nonphysical injuries to the individual, such as those affecting emotions, reputation, or character...." Burke, 504 U.S. at 235 n. 6, 112 S.Ct. 1867. See also Schleier, 515 U.S. at 329 & n. 4, 115 S.Ct. 2159 (stating that § 104(a)(2) covers "intangible as well as tangible harms"). Specifically, personal injuries include emotional distress, see Burke, 504 U.S. at 235 n. 6, 112 S.Ct. 1867, mental pain and suffering, see Bent v. Commissioner, 835 F.2d 67, 70 (3d Cir.1987), and injury to personal and professional reputation. See Threlkeld v. Commissioner, 848 F.2d 81, 83-84 (6th Cir.1988); Church v. Commissioner, 80 T.C. 1104, 1109, 1983 WL 13864 (1983). Here, Greer's tort claim sufficiently encompasses personal injury. Specifically, Greer claims injuries to his personal and professional reputation, as well as distress, humiliation, and mental anguish. These claims of non-physical injury fall within the broad ambit of § 104(a)(2) "personal" injuries. [FN3]

FN3. In 1996, Congress amended § 104(a)(2) to read "on account of personal physical injuries or physical sickness." (emphasis added). Because the amendment took effect after AOI and Greer executed their agreement, it is not applicable to this case.

Thus, § 104(a)(2) does not make physical injury and personal injury synonymous.

The evidence of what lawyers generally believe is meant by personal injury is enlightening but unpersuasive. The trier of fact determines the probative weight to be given to an expert's testimony. Berkeley Electric Coop. v. S.C. Pub. Serv. Comm'n, 304 S.C. 15, 402 S.E.2d 674 (1991). Indeed, the trier of fact is not compelled to accept an expert's testimony, but may give it the weight and credibility he determines it deserves. Florence County Dep't of Soc. Servs. v. Ward, 310 S.C. 69, 425 S.E.2d 61 (1992); Greyhound Lines v. S.C. Pub. Serv. Comm'n, 274 S.C. 161, 262 S.E.2d 18 (1980). In the instant case, the lawyer's testimony was simply not convincing in light of the legislative and litigation history of § 104. That history is more compelling and shows a clear differentiation between personal injuries that are physical and those that are non-physical with the amendment to § 104 requiring the presence of a physical injury or sickness.

c. Causal Link

Finally, as to the evidence of the causal link between the payment and the taxpayer's worsening colitis condition, the taxpayer suggests that the only evidence of such a link came from the taxpayer and that such evidence demonstrates the actions of the agency caused the worsening condition.

i. Issue in Perspective

Before addressing this "evidence" question, the issue of the causal link must be placed in proper perspective. The issue in this case is not whether the taxpayer had a physical problem. Indeed, the factual findings in the original order confirm that a physical problem existed. Rather, the fundamental issue is whether the payor made its settlement payment for a physical injury or sickness which, form the taxpayer's view, is her colitis condition.

In answering that question, the original order found that the settlement was paid both to end the then existing federal lawsuit as well as to preclude any future lawsuit for any other causes of action arising from the same events. Since the payment was made for these two categories, the issue of deciding the payor's intent in making the payment is answered by examining what the payor knew about the categories and what intent did the payor express as to the payment being for a physical injury or sickness.

The original order answered the inquiry by finding that the payor had specific knowledge of only one lawsuit, the federal suit and had no specific knowledge of any other future lawsuit or cause of action. Further, as to any lawsuit (whether actual or potential), no intent existed to make payments for a physical injury and nothing in the reconsideration requires or allows changing that conclusion.

- The Actual Lawsuit -

For example, as to the payment of funds to the taxpayer for ending the existing federal lawsuit, the original order explained the following:

[F]rom start to finish, the three causes of action speak to employment discrimination and the damages asked for are only non-physical injuries. Thus, based on the complaint filed, the intent of the payor was to pay for an employment discrimination action for which the payment was made for non-physical injuries.

Hence, the payment was made to end a lawsuit that simply did not ask for damages for colitis or for any other physical injury. Thus, neither the presence nor the absence of evidence seeking to demonstrate that the actions of the agency caused the worsening condition are meaningful since the federal lawsuit simply did not seek such damages.

- The Potential Lawsuit -

The same inquiry of deciding the payor's intent in making the payment to settle any future potential claims is answered by examining what did the payor know about the future potential claims and did the payor express any intent to make a payment for any physical injury or sickness stemming from any such future claim.

In examining the evidence produced at the hearing as to such potential claims, the only physical ailment conceivably known to the agency at the time of payment was the colitis condition. Further, while no potential causes of actions were argued at the hearing, given the manner in which the alleged physical injury resulted, the likely potential claims available to the taxpayer are the torts of intentional infliction of emotional trauma or the tort of inflicting emotional distress. Thus, was there any reason to believe that the payor was making a payment to end these potential claims? The original order held "no," and I can find no basis in the Motion for Reconsideration to allow changing that position. Indeed, the original order explained:

[N]o suit alleged the specific physical injuries of colitis and proctitis. Therefore, at the time of payment, the payor had no specific allegations before it upon which one could reasonably conclude that the payment was made for the taxpayer's colitis and proctitis.

Thus, again, just as with the federal lawsuit, the taxpayer had not asked for damages for a physical injury for any cause of action for the intentional infliction of emotional trauma or the tort of inflicting emotional distress. Indeed, nothing in the evidence establishes that the taxpayer was contemplating any additional suits and no persuasive basis exists to conclude the payor had any intention to make its payment for physical injury or sickness. Accordingly, just as with the federal lawsuit, neither the presence nor the absence of evidence seeking to demonstrate that the actions of the agency caused the worsening condition are meaningful since nothing was before the payor which suggested future lawsuits were being ended that would seek damages for a physical injury or sickness.

ii. Lack of Evidence of Causal Link

In addition to finding that the payor expressed no intention of making its settlement payment for the colitis condition, I must also disagree with the taxpayer's argument in its Motion for Reconsideration which asserts that the only evidence of the causal link between the payment and the taxpayer's worsening colitis shows the actions of the agency did in fact cause the worsening condition.

On the contrary, the original order identifies the following evidence showing a lack of a causal connection:

For example, the evidence establishes that the director had essentially no contact with the taxpayer. Thus the director's actions do not provide a direct link between the payment and the colitis. Further, while the evidence suggests that stress is a contributing factor to a colitis "flare up," the evidence does not persuasively establish that the actions of the agency exacerbated the colitis. Indeed, other causes may have been at work. For example, lawsuits are stressful in and of themselves. The mere fact of filing and pursuing a lawsuit against one's employer while continuing in the employer's employment may produce a stress inducing environment. Indeed, the taxpayer stated that her colitis had recently become more of a problem due to the litigation surrounding the instant tax dispute. Therefore, the evidence of a worsening colitis condition is simply too attenuated to form a causal link to the payment of the funds.

Thus, the most persuasive evidence shows a lack of a causal link between the payment and the taxpayer's worsening colitis condition. Moreover, the taxpayer must satisfy the requirements for an exclusion or a deduction from income. In meeting those requirements, statutes granting exemptions will not be strained or liberally construed in favor of the taxpayer; in order to be entitled to such exemption, the taxpayer must clearly bring himself within the exemption upon which he relies. Textile Hall Corp. v. Hill, 215 S.C. 262, 54 S.E.2d 809 (1949), Arkwright Mills v. Murph, 219 S.C. 438, 65 S.E.2d 665 (1951); M.B. Kahn Construction Co. v. Crain, 222 S.C. 17, 71 S.E.2d 503 (1952), and York County Fair Ass'n. v. S.C. Tax Comm'n, 249 S.C. 337, 154 S.E.2d 361 (1967). Likewise, a deduction is available only where the taxpayer brings himself squarely within the terms of the statute expressly authorizing the deduction. Southern Weaving Co. v. Query, 206 S.C. 307, 34 S.E.2d 51 (1945), Fennell v. S.C. Tax Comm'n, 233 S.C. 43, 103 S.E.2d 424 (1958), Colonial Life & Accident Ins. Co v. S.C. Tax Comm'n, 248 S.C. 334, 149 S.E.2d 777 (1966), Adams v. Burts, 245 S.C. 339, 140 S.E.2d 586 (1965), and Southern Soya Corp. v. Wasson, 252 S.C. 484, 167 S.E.2d 311 (1969). In the instant case, the taxpayer has simply not demonstrated that the exclusion from income has been met. Here, the evidence that the causation of the worsening condition was in the actions of the director and the agency is simply to attenuated to bring the taxpayer squarely within the terms of the exclusion from income.

3. Attorney Fees and Interest

I have considered the arguments made in the Motion for Reconsideration relative to the attorney fees and interest issues. The analysis in the original order properly addresses the positions raised, and I find no basis for amendment here.

The taxpayers' positions presented in its Motion for Reconsideration have been examined. I find no alteration or amendment shall be made to the final conclusions reached in the original order in this case dated March 28, 2002. Further, the instant order shall supplement the original order of March 28, 2002.

AND IT IS SO ORDERED

______________________

RAY N. STEVENS

Administrative Law Judge

Dated: April 18, 2002

Columbia, South Carolina