## Facts

- Ronald W. Parkinson worked for 28 years at a medical center, ultimately supervising an ultrasound/vascular lab, and experienced a heart attack while employed.
- After later going on medical leave and not returning, Parkinson alleged that workplace pressure and confrontations contributed to another heart attack, cardiovascular damage, and total disability.
- Parkinson sued his employer and two employees, asserting disability-discrimination claims and state-law claims for intentional infliction of emotional distress and invasion of privacy, alleging emotional distress manifested by physical injury, including a heart attack.
- During trial, the parties settled under a written agreement requiring the employer to pay $350,000 for a broad release of claims; the agreement did not allocate damages among claims or categories.
- In 2005, Parkinson received $34,000 of the settlement proceeds and did not report it as income.
- In 2005, Parkinson also received long-term disability benefits with federal income tax withheld and took a retirement-plan distribution before age 59½.
- The IRS determined a deficiency and an accuracy-related penalty; the IRS later conceded self-employment tax was not owed.

## Issues

1. Whether the $34,000 settlement proceeds received in 2005 were excludable from gross income under I.R.C. § 104(a)(2) as damages received on account of personal physical injuries or physical sickness.
2. Whether Parkinson proved an income tax overpayment based on withholding from disability benefits.
3. Whether Parkinson owed the 10% additional tax on an early retirement-plan distribution under I.R.C. § 72(t).
4. Whether Parkinson was liable for the I.R.C. § 6662(a) accuracy-related penalty.

## Decision

- The court held the 2005 settlement proceeds were excludable under § 104(a)(2) because they were received on account of a heart attack and related physical injury/sickness alleged to have been caused by the employer’s conduct.
- The court denied the claimed overpayment related to disability-benefit withholding for lack of substantiation beyond amounts already allowed.
- The court imposed the § 72(t) 10% additional tax on the early retirement-plan distribution because no proven statutory exception applied.
- The court sustained the § 6662(a) accuracy-related penalty, finding negligence and no adequate showing of reasonable cause or good faith.

## Legal Principles

- Under § 104(a)(2), damages are excluded from income only if received on account of personal physical injuries or physical sickness; emotional distress is not treated as physical injury or sickness (subject to limited medical-expense treatment).
- For unallocated settlements, the characterization of proceeds depends on the payor’s intent as shown by the claims asserted and the factual context (including pleadings, evidence, and settlement posture), not solely by general release language.
- A heart attack and its physical aftereffects constitute “physical injury or physical sickness” for § 104(a)(2) purposes, and proceeds may be excluded when the record shows a direct causal link between the injury/sickness and the payment.
- The taxpayer bears the burden to substantiate withholding credits and any claimed overpayment.
- Section 72(t) imposes a 10% additional tax on early qualified-plan distributions unless the taxpayer proves a specific statutory exception.
- Section 6662(a) applies for negligence or substantial understatement; the penalty is avoided only with a showing of reasonable cause and good faith, typically supported by competent, specific advice and proper reporting.

## Conclusion

The Tax Court treated a heart attack as a qualifying physical injury/sickness and excluded settlement proceeds where the record showed the payment was made on account of that injury, but it rejected an unproven overpayment claim, imposed the § 72(t) additional tax for an early retirement distribution, and upheld the § 6662 accuracy-related penalty for negligent reporting without reasonable-cause support.


Parkinson v. Commissioner, T.C. Memo. 2010-142 (2010)