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functions are inextricably intertwined, and the dean’s executive assistant. payment was for “alleged non-wage
the court concluded that Mayo did not A few months later, Tillman-Kelly injuries, as non-economic emo-
have any substantial noneducational expressed concerns to the U.S. Depart- tional distress damages.” The university
purposes. ment of Education and the university’s reported the payment to the IRS
Holding: The Mayo Clinic was ethics office that “certain grant funds on Form 1099-MISC, Miscellaneous
found to be an educational organization were being misappropriated.” In Income, which Tillman-Kelly and his
under Sec. 170(b)(1)(A)(ii). As a result, June 2010, the university terminated wife did not report as gross income on
the court entered judgment in favor of Tillman-Kelly’s employment. their 2017 federal income tax return.
the Mayo Clinic and held it is entitled After his termination, Tillman- The IRS issued the Tillman-Kellys
to repayment of the $11.5 million origi- Kelly filed suit against the university a deficiency notice claiming that the
nally in question plus statutory interest. and its board of trustees, ultimately in settlement payment should have been
■ Mayo Clinic, No. 16-cv-03113 Illinois state court, alleging that the included in gross income.
(D. Minn. 11/22/22) university retaliated against him for his Issues: Settlement proceeds
whistleblower complaint. He stated in received from a legal proceeding
— Matthew Geiszler, Ph.D., is a lecturer constitute gross income unless a
in accounting within the College of Human specific statutory exception applies
Ecology; Nay Thu Rein (Jacky) Aung is a (see Save, T.C. Memo. 2009-209). Sec.
master of health administration candidate 104(a)(2) states that damages awarded
in the Sloan Program in Health Adminis- as part of a settlement or judgment can
tration; and John McKinley, CPA, CGMA, be excluded from gross income if they
J.D., LL.M., is a professor of the practice are “on account of personal physical
in accounting and taxation within the SC injuries or physical sickness.”
Johnson College of Business, all at Cornell Emotional distress is not itself
University in Ithaca, N.Y. treated as a personal physical injury
or physical sickness for this purpose
the complaint that he was subjected to under Sec. 104(a). However, damages
“humiliation, isolation, harsher disci- for emotional distress may be excluded
Emotional-distress pline, and different and comparatively from gross income if the distress is
settlement denied more negative terms and standards of “attributable to a personal physical
exclusion treatment employment” than other university injury or physical sickness” (Regs. Sec.
1.104-1(c)(1); see also Rivera v. Baker
employees. Tillman-Kelly also asserted
A university whistleblower’s that his supervisor threatened to “do West, Inc., 430 F.3d 1253 (9th Cir.
damages did not address alleged what he had to do” in response to 2005)). For this exclusion to apply,
physical injuries, the Tax Court the whistleblower allegation, which, there must be a “direct causal link”
concludes. according to Tillman-Kelly’s com- between the damages awarded and the
plaint, included his job responsibilities personal physical injury or physical
By John McKinley, CPA, CGMA, being eliminated. Nowhere within the sickness (Doyle, T.C. Memo. 2019-8,
J.D., LL.M.; Matthew Geiszler, complaint did Tillman-Kelly allege quoting Rivera, 430 F.3d at 1257).
Ph.D.; and Marquise Riley, CPA that he suffered any physical injuries or When damages are received pursu-
sought damages for them. In Tillman- ant to a settlement agreement, the
A taxpayer could not exclude emotion- Kelly’s responses to interrogatories in Supreme Court held in Burke, 504 U.S.
al-distress damages from gross income the state court action, he stated that the 229, 237 (1992), “the nature of the
under Sec. 104 after being terminated dean’s assistant slammed a door on him, claim that was the actual basis for the
from his employment at a midwestern causing an injury. However, he did not settlement controls whether the dam-
university, the Tax Court held. describe the injury further or mention ages are excludable under Sec. 104(a)
Facts: Bryant Tillman-Kelly was it in another interrogatory asking for (2).” The nature of the claim is deter-
hired as project director in September the basis of his damages claim. mined from the “underlying agree-
2009 to oversee and manage a federal Tillman-Kelly settled his suit with ment” and, if it is unstated there, the
grant the university received. In his the university in 2017. The settlement payer’s intent is considered by looking
position, he reported directly to a dean agreement specifically stated that the at all the facts and circumstances

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