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TAX MATTERS

Individual returns requiring IRS manual processing at responsibilities and ultimately termi-
year end, 2021 and 2022 nation, not physical injury.” Moreover,
his complaint did not seek damages
for physical injury, instead pursuing
12 damages for “emotional distress and
humiliation and lost income and
benefits.”
10
As a result, the court sustained the
IRS’s deficiency notice.
■ Tillman-Kelly, T.C. Memo.
8
2022-111

6 — John McKinley, CPA, CGMA, J.D.,
Millions LL.M., is a professor of the practice
in accounting and taxation within
4 the SC Johnson College of Business;
Matthew Geiszler, Ph.D., is a lecturer in
accounting within the College of Human
2 Ecology; and Marquise Riley, CPA,
MPS, is a lecturer in accounting within
the SC Johnson College of Business, all at
0
Cornell University in Ithaca, N.Y.
Paper Paper and electronic; Amended Total unprocessed
processing suspended returns
 Dec. 31, 2021  Dec. 9, 2022
Bank deposits
Source: National Taxpayer Advocate, Annual Report to Congress 2022, page 3.
analysis upheld
The Tax Court rejects a
surrounding the agreement, such as the payment as arising from a personal taxpayer’s claim that the IRS’s
“the amount paid, the allegations in physical injury, which was made clear reconstruction of his income
the injured party’s complaint, and the by all the facts and circumstances included nontaxable proceeds
factual circumstances that led to the surrounding the initial complaint and from a real estate sale.
agreement” (Rivera, 430 F.3d at 1257). settlement agreement.
The character of the payment is based The court rejected Tillman-Kelly’s By John McKinley, CPA, CGMA, J.D.,
on the payer’s “dominant reason” for claim that the settlement represented a LL.M.; Matthew Geiszler, Ph.D.; and
making the payment (see Green, 507 payment for a personal physical injury Marquise Riley, CPA
F.3d 857, 868 (5th Cir. 2007)). from the slammed door, noting that it
Holding: The Tax Court held that was not mentioned in the settlement The Tax Court approved the IRS’s ap-
the settlement agreement between agreement as a cause of damages. plication of the bank deposits method
Tillman-Kelly and the university Even if it were to look past the to establish the amount of a taxpayer’s
established that the settlement amount plain language of the settlement additional unreported business income.
was not excludable from gross in- agreement, the Tax Court concluded, Facts: Richard Showalter was the
come as a personal physical injury or Tillman-Kelly “would fare no bet- sole owner of Real Estate Consulting
physical sickness under Sec. 104(a)(2). ter.” It found that Tillman-Kelly’s Services (RECS), a single-member lim-
The court found that the settlement complaint in his state court case did ited liability company (LLC) treated as
amount was really a payment for not relate to compensation for physical a sole proprietorship for tax purposes.
“non-wage injuries, as non-economic injuries. Rather, it alleged that the Showalter did not file an individual
emotional distress damages,” as stated university violated the Illinois state income tax return for 2013. The IRS,
in the text of the settlement agree- whistleblower statute by taking retalia- based on information submitted by
ment. Further, the court did not find tory actions against Tillman-Kelly third-party payers, prepared a substi-
any intent of the payer to characterize “involving improper removal of job tute for return to calculate Showalter’s

34 | Journal of Accountancy April 2023