ORDERS:
FINAL ORDER AND DECISION
STATEMENT OF THE CASE
This matter comes before the Administrative Law Judge Division pursuant to S.C. Code Ann. § 12-60-470(F) (2000); S.C. Code
Ann. § 12-4-30(D) (2000); and S.C. Code Ann. § 1-23-600 (Supp. 1999). The Petitioners (husband and wife) requested a contested
case hearing to seek review of a Final Agency Determination issued by the Respondent, South Carolina Department of Revenue
("DOR"). DOR determined that money received by Petitioner (husband) from his employer in settlement of various legal claims was
taxable and that the Petitioners improperly excluded this money from their 1997 income tax return. Therefore, DOR denied
Petitioners' request for a refund. After notice to all parties, a hearing was conducted on August 9, 2000 at the Administrative Law
Judge Division ("ALJD") in Columbia, South Carolina.
FINDINGS OF FACT
Having carefully considered the testimony and the arguments of both sides, and taking into account the credibility of the evidence and
witnesses, I find by a preponderance of the evidence:
1. Notice of the time, date, place and subject matter of the hearing was given to all parties in a timely manner.
2. The Petitioners are residents of South Carolina.
3. Petitioner (husband) was diagnosed with ulcerative colitis in 1984 and suffered a flare-up of this disease in 1996. On November
15, 1996, the Social Security Administration found that Petitioner was disabled.
4. Also, in November 1996, Petitioner was terminated from his job at a South Carolina corporation (Corporation). Subsequently,
Petitioner and Corporation entered into an agreement in which Petitioner agreed not to bring various legal claims against Corporation
and, in return, Petitioner received a salary for six (6) months. Petitioner received $42,163.57 from Corporation, and Corporation
issued Petitioner a W-2 that reflected this amount.
5. The Petitioners filed their 1997 income tax return in March 1998, but Petitioners did not include the $42,163.57 in income. The
Petitioners did include the W-2 with their tax return, along with an explanation of the reasons that they did not include the money in
income.
6. Thereafter, DOR audited the Petitioners' 1997 income tax return and found that the $42,163.57 should have been included in
income.
7. The Petitioners paid the tax, interest, and penalties attributable to this W-2 and then filed an amended tax return. On this tax
return, the Petitioners requested a refund of $2,925.00. 8. DOR issued a Final Agency Determination on April 4, 2000, and
determined that the $42,163.57 was taxable and should have been included in Petitioners' income. DOR therefore denied Petitioners'
request for a refund.
CONCLUSIONS OF LAW
Based upon the above Findings of Fact, I conclude, as a matter of law, the following:
1. The ALJD has subject matter jurisdiction over this action pursuant to S.C. Code Ann. § 12-60-470(F) (2000); S.C. Code Ann. §
12-4-30(D) (2000); and S.C. Code Ann. § 1-23-600 (Supp. 1999).
2. Petitioner (husband) asserts that the money he received from Corporation should be excluded from his income under I.R.C. §
104(a)(2), which provides that gross income does not include "the amount of any damages (other than punitive damages) received
(whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical
sickness." I.R.C. § 104(a)(2).
3. In S.C. Code Ann. § 12-6-50 (2000), South Carolina adopts I.R.C. § 104.
4. I conclude that I.R.C. § 104(a)(2) does not apply in this case. The money that Petitioner received from Corporation was not
damages received "on account of personal physical injuries or physical sickness." I.R.C. § 104(a)(2). Corporation did not cause
Petitioner's medical condition because Petitioner was diagnosed with this illness prior to beginning work at Corporation. Petitioner
received this money as consideration for his promise not to bring a legal action against Corporation after his termination. A
Committee Report on I.R.C. § 104 states that "the exclusion from gross income does not apply to any damages received based on a
claim of employment discrimination or injury to reputation accompanied by a claim of emotional distress." CCH - Standard Federal
Tax Reports, ¶ 6660, at 19,634 note 137 (2000).
5. Also, Petitioner asserts that he is entitled to deduct the $42,163.57 from his income under S.C. Code Ann. § 12-6-1140(4) (2000).
This section allows a deduction from income for persons who receive "disability retirement due to permanent and total disability"and
qualify for the homestead exemption. S.C. Code Ann. § 12-6-1140(4) (2000).
6. I conclude that Petitioner is not entitled to deduct the money he received from Corporation under S.C. Code Ann. § 12-6-1140(4)
(2000). The money that Petitioner received was not "disability retirement due to permanent and total disability." S.C. Code Ann. §
12-6-1140(4) (2000). Petitioner may have been terminated on account of his disability, but he received the money from Corporation
in exchange for his promise not to sue Corporation for an illegal termination. Petitioner did not receive the money because he
became disabled. Also, Petitioner's disability did not render him totally and permanently disabled. Petitioner became employed
approximately eleven months after he was terminated from Corporation, and he is still employed.
7. I conclude that the money Petitioner received from Corporation is taxable income.
ORDER
Based upon the above Findings of Fact and Conclusions of Law,
IT IS THEREFORE ORDERED that Petitioners' request for an income tax refund is denied.
AND IT IS SO ORDERED.
_________________________________
C. Dukes Scott
Administrative Law Judge
August 25, 2000
Columbia, South Carolina
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