Debra Blum v. Cir

Opinion

NOT FOR PUBLICATION FILED UNITED STATES COURT OF APPEALS JUN 2 2022 MOLLY C. DWYER, CLERK U.S. COURT OF APPEALS FOR THE NINTH CIRCUIT

DEBRA JEAN BLUM, No. 21-71113

Petitioner-Appellant, Tax Ct. No. 20020-17

v.

COMMISSIONER OF INTERNAL AMENDED MEMORANDUM* REVENUE,

Respondent-Appellee.

Appeal from a Decision of the United States Tax Court

Argued and Submitted March 8, 2022 Seattle, Washington

Before: NGUYEN, MILLER, and BUMATAY, Circuit Judges.

Debra Blum appeals from a Tax Court decision upholding the Internal

Revenue Service’s tax deficiency determination of $27,418.00. We review the Tax

Court’s interpretations of the Tax Code de novo, Meruelo v. Comm’r, 691 F.3d 1108,

1114 (9th Cir. 2012), and findings of fact for clear error, Boyd Gaming Corp. v.

Comm’r, 177 F.3d 1096, 1098 (9th Cir. 1999). We have jurisdiction under 26 U.S.C.

* This disposition is not appropriate for publication and is not precedent except as provided by Ninth Circuit Rule 36-3. § 7482(a)(1) and affirm.

The Tax Court properly found that Blum’s legal malpractice settlement

proceeds were not exempt from taxation under 26 U.S.C. § 104(a)(2). As a general

matter, the Tax Code provides that “gross income means all income from whatever

source derived.” 26 U.S.C. § 61(a). The Tax Code, however, excludes from taxable

income “the amount of any damages . . . received (whether by suit or agreement . . .)

on account of personal physical injuries or physical sickness.” 26 U.S.C.

§ 104(a)(2).

To exclude income under § 104(a)(2), a taxpayer must show that “the damages

were received on account of personal physical injuries or physical sickness.” Rivera

v. Baker W., Inc., 430 F.3d 1253, 1256 (9th Cir. 2005) (simplified). This requirement

can only be satisfied if there is a “direct causal link” between the damages and the

personal injury suffered. Id. at 1257 (simplified). In the context of a settlement

agreement, a taxpayer can establish that direct causal link through the express terms

of the agreement or, if the terms of the agreement are unclear, by the intent of the

payors. See id.

The express terms of Blum’s settlement agreement make clear that there was

no direct causal link between the legal malpractice settlement and her physical

injuries. The settlement agreement expressly states that Blum and her attorneys

maintain “that Blum did not sustain any physical injuries as a result of the alleged

2 negligence of either Kozlowski or Celski [her attorneys].” And the agreement

further states that it was entered into “for the purpose of compromising and settling

the [malpractice] dispute between [the parties].” Taken together, the express terms

of the agreement demonstrate that the settlement was entered to compensate Blum

for the harm caused by her lawyers’ legal malpractice, rather than the physical

injuries she sustained in her underlying negligence action. As the Tax Court

accurately put it, the terms of the agreement “make[] clear that the payment was in

lieu of damages for legal malpractice.”

When the express terms of the agreement make the purpose of the settlement

clear, we need not look to the intent of the payors. See Rivera, 430 F.3d at 1257.

Because the agreement’s express terms clearly indicate that Blum was not

compensated for her physical injuries, the Tax Court properly concluded that the

settlement proceeds were not exempt from taxation under § 104(a)(2).

AFFIRMED.