SUPPLEMENTAL MEMORANDUM OPINION
CHIECHI, JUDGE: This case is before us on remand from the Court of Appeals for the Eleventh Circuit in Henry v. Commissioner, 234 F.3d 34 (11th Cir. 2000), vacating and remanding without published opinion T.C. Memo 1999-205. The Court of Appeals remanded this case for further consideration in light of Fabry v. Commissioner, 223 F.3d 1261 (11th Cir. 2000), revg. 111 T.C. 305 (1998). In remanding this case for that purpose, the Court of Appeals stated: "We imply no view as to the result that should be reached on remand." 1
The findings of fact are set forth in Henry v. Commissioner, T.C. Memo 1999-205 (Henry I), and are incorporated herein by this reference. 2
FABRY v. COMMISSIONER
In Fabry v. Commissioner, 111 T.C. 305 (1998) (Fabry I), the taxpayers (the Fabrys) operated a nursery in which they grew ornamental plants, and they developed a reputation for growing quality plants. See id. at 306. In connection with the operation of their nursery, the Fabrys used Benlate, a fungicide, on the plants that they grew and suffered extensive damage to those plants, which they claimed was the result of their use of Benlate. See id. at 307. The Fabrys sued du Pont, the manufacturer of Benlate, in the Court of the Ninth Judicial Circuit in and for Orange County, Florida. In that suit, the Fabrys alleged that du Pont had allowed Benlate to become contaminated so as to cause the damages that they suffered from having used it on their stock of plants. The Fabrys demanded a judgment for monetary damages from du Pont under theories of negligence and strict liability in tort. Under both theories, the Fabrys claimed that they sustained damages in the form of the lost value of destroyed or injured plants, damage to their business reputation, lost income, and the lost value of their business. After mediation, the suit which the Fabrys instituted against du Pont was concluded pursuant to a stipulation under which du Pont agreed to pay them $ 3,800,000. See id.
The Commissioner of Internal Revenue (Commissioner) conceded in Fabry I that $ 500,000 of the $ 3,800,000 that du Pont paid to the Fabrys constituted damages for injury to their business reputation. See id. Thus, there was no dispute between the parties in Fabry I, as there was in Henry I, that a specified amount of the total damages paid was paid as damages for injury to business reputation. The only question presented to us in Fabry I was whether, as argued by the Fabrys, the $ 500,000 that du Pont paid to them as such damages was received on account of personal injuries, as that term is used in section 104(a)(2). See id. at 308.
In advancing their position in Fabry I, the Fabrys maintained that injury to business reputation is, as a matter of law, a personal injury within the meaning of section 104(a)(2). See id. at 309. We rejected that argument. See id. at 310-311. Having rejected the Fabrys' argument that injury to business reputation is, as a matter of law, a personal injury within the meaning of section 104(a)(2), we examined the facts and circumstances surrounding the $ 500,000 payment at issue in that case in order to determine whether that payment was made on account of personal injuries, as that term is used in section 104(a)(2). See id. at 311-314. Based on our examination of all the facts and circumstances surrounding that $ 500,000 payment, we concluded in Fabry I:
Since the record of the lawsuit that is before us does not
include any claim for personal injuries within the meaning of
section 104(a)(2), we do not believe that the claim for injury
to business reputation was on account of personal injuries, as
that term is used in section 104(a)(2). * * *
Id. at 314.
The Court of Appeals reversed our decision in Fabry I in Fabry v. Commissioner, 223 F.3d 1261 (11th Cir. 2000) (Fabry II). After reviewing certain case law under section 104(a)(2), the Court of Appeals turned to this Court's opinion in Fabry I. The Court of Appeals acknowledged in Fabry II that "The IRS stipulated at trial that the $ 500,000 payment was properly allocable as damage to the Fabry's business reputation", 3id. at 1268-1269, and that the case presented a single question of law, i.e., whether the $ 500,000 of damages that du Pont paid to the Fabrys for injury to their business reputation was a payment received on account of personal injuries within the meaning of section 104(a)(2), see id. The Court of Appeals found our facts and circumstances approach to that question in Fabry I to be insufficient. See id. at 1269. The Court of Appeals stated: "Its [the Tax Court's] method of merely perusing the record, looking for the presence of the magic words, 'personal injury,' either in the complaint, the release, mediation correspondence or settlement documents is incorrect." Id.
In deciding Fabry II, the Court of Appeals examined intangible injuries such as injury to business reputation in light of Commissioner v. Schleier, 515 U.S. 323, 132 L. Ed. 2d 294, 115 S. Ct. 2159 (1995), and cases decided after Schleier, including O'Gilvie v. United States, 519 U.S. 79, 136 L. Ed. 2d 454, 117 S. Ct. 452 (1996), and Greer v. United States, 207 F.3d 322 (6th Cir. 2000). See Fabry v. Commissioner, supra 223 F.3d at 1269-1270. The Court of Appeals then examined what it considered to be the "unique facts" presented in Fabry. See id. 223 F.3d at 1270-1271. On the basis of that examination, the Court of Appeals held that, in light of those unique facts, the Fabrys had established that the $ 500,000 which the Commissioner conceded was paid by du Pont as damages for injury to their business reputation was received on account of personal injuries, as required by Commissioner v. Schleier, supra at 337, and consequently is excludable from gross income under section 104(a)(2). See Fabry v. Commissioner, supra at 1271. Henry v. Commissioner
While summarizing the procedural background of the case before it on appeal in Fabry v. Commissioner, supra, the Court of Appeals cited in a footnote our opinion in Henry v. Commissioner, T.C. Memo 1999-205, and described our findings in that opinion as follows:
6. See also Henry v. Commissioner, T.C. Memo 1999-205, 1999 Tax Ct. Memo LEXIS 241, 77 T.C.M. (CCH) 2209, T.C.M. (RIA) 99205, 1999 WL
405225 (1999)(where, relying upon its opinion in this case,
Fabry v. Commissioner, 111 T.C. 305, 1998 WL 872851 (1998), the
tax court found that the $ 1,623,203 payment received in 1994 by
the taxpayer, a Florida orchid grower, for loss of business
reputation and loss of business reputation as an orchid grower,
in settlement of his claim for negligence and strict liability
in tort against du Pont, after application of its chemical
fungicide on his orchids, was not made "on account of personal
injuries" within the meaning of IRC section 104 * * * [a](2) and
was includable in gross income for income tax purposes).
Fabry v. Commissioner, supra 223 F.3d at 1263 n.6.
With all due respect, we did not find in Henry I that the $ 1,623,203 payment that petitioner received from du Pont in 1994 was for loss of business reputation and loss of business reputation as an orchid grower. On the record presented to us, we found in Henry I that "petitioner has failed to establish that all or any portion of the $ 2,800,000 total settlement amount, or the $ 1,623,203 settlement payment, was paid by reason of, or because of, the loss of the plaintiffs' business reputation or the loss of their reputation as orchid growers." Henry v. Commissioner, T.C. Memo 1999-205, 1999 Tax Ct. Memo LEXIS 241, 77 T.C.M. (CCH) 2209, 2222, T.C.M. (RIA) 99205. In making the foregoing finding, we carefully reviewed the record in the instant case, which included portions of the record in the lawsuit (lawsuit) that petitioner and his former spouse Donna Henry, d.b.a. Fred Henry's Paradise of Orchids (collectively the plaintiffs), had filed against du Pont and others. In the lawsuit, the plaintiffs alleged, inter alia, negligence by du Pont and strict liability in tort of du Pont. See Henry v. Commissioner, 77 T.C.M. (CCH) at 2213-2214, 1999 T.C.M. (RIA) 99205. The plaintiffs alleged in the lawsuit that the damages to them were a direct and proximate result of the negligence of du Pont and the defective condition of Benlate. The plaintiffs claimed as damages in the lawsuit (i.e., as losses) that they suffered and continue to suffer
lost profits, loss of business, loss of business reputation,
loss of the reputation of FRED HENRY and DONNA HENRY as orchid
growers, diminution of sales, incurred additional business
expenses, have had a reduction in the value of the business,
have lost plants, have suffered a diminution in the value of
their nursery as a result of chemical contamination of the soil,
and have suffered other consequential losses and damages.
Henry v. Commissioner, 77 T.C.M. (CCH) at 2214, 1999 T.C.M. (RIA) 99205.
Although the plaintiffs claimed damages in the lawsuit for injury to their business reputation and injury to their reputation as orchid growers, at the conclusion of the trial in that lawsuit, which lasted about a month, the plaintiffs' attorney informed the jury in closing arguments that the plaintiffs were not asking for damages for loss of reputation. He stated in pertinent part:
Now, this is probably the simplest economic chart ever
presented in a case, but basically what it boils down to is
this. Remember we had Dr. Reavy come up and explain to you that
he looked at the inventory, and what he did, he only did one
thing with the inventory, and that is, he reduced it from retail
to wholesale. In other words, when they had done the inventory,
they did it on a retail basis, and Dr. Reavy said, no, wait a
minute; if he's going to be a wholesale grower, we'll put a
wholesale value on it. Dr. Reavy actually reduced the inventory
to this 3,254,000 to reflect the wholesale value of the plants.
Then, if you may remember, what we did then was I said, now, Dr.
Reavy, if you figure in just eight percent a year on that money
for the last two years, what are the losses to Fred and Donna
because of the loss of their inventory. When you figure in the
eight percent for two years, it comes out to $ 3,796,000.
Now, I submit to you that that's a very conservative figure
when you think about it. ALL WE'RE ASKING FOR HERE IS THE
INVENTORY. WE'RE NOT ASKING FOR business -- or the loss of the
business or LOSS OF REPUTATION or any of that sort of stuff.
That's purely the value of the inventory. [Emphasis added.]
Henry v. Commissioner, 77 T.C.M. (CCH) at 2215, 1999 T.C.M. (RIA) 99205. 4
After the trial in the lawsuit, the jury rendered a verdict (jury verdict) finding (1) that du Pont placed Benlate on the market with a defect which was the legal cause of damage to the plaintiffs, (2) that there was negligence on the part of du Pont which was a legal cause of damage to them, and (3) that there was negligence on the part of the plaintiffs which was a legal cause of damage to them. The jury charged 80 percent of total responsibility to du Pont and 20 percent of total responsibility to the plaintiffs. In other words, the jury found du Pont 80 percent negligent and the plaintiffs 20 percent negligent. The jury further found that the total amount of damages sustained by the plaintiffs, without any reduction for the percentage of responsibility that the jury charged to them, was $ 3,796,318. The total amount of damages was reduced to $ 3,037,054 to take account of the jury verdict that the plaintiffs were 20 percent negligent. On motion of du Pont, the judgment of $ 3,037,054 was reduced to $ 2,837,054 in order to account for the total of $ 200,000 in assistance payments that du Pont had made to Mr. Henry in 1991 and 1992. On December 8, 1993, the Florida court entered an amended final judgment (judgment) in the plaintiffs' favor in the amount of $ 2,837,054. See Henry v. Commissioner, 77 T.C.M. (CCH) at 2216, 1999 T.C.M. (RIA) 99205.
While the judgment was on appeal by du Pont, the plaintiffs and du Pont engaged in settlement negotiations. As a result of those negotiations, the plaintiffs offered to settle the lawsuit for $ 2,800,000, and that settlement offer was accepted by du Pont on the date it was made. That $ 2,800,000 settlement negotiated between the plaintiffs and du Pont, which was part of a global settlement of approximately 200 claimants against du Pont, was paid by du Pont as a result of the jury verdict. Pursuant to the stipulation of settlement to which the plaintiffs and du Pont agreed (stipulation of settlement), (1) du Pont agreed to pay the plaintiffs' cost of the lawsuit, (2) the plaintiffs executed a document entitled "RELEASE, INDEMNITY AND ASSIGNMENT" (release, indemnity, and assignment), and (3) a notice of voluntary dismissal of the appeal of the lawsuit was filed on or about May 13, 1994. 5 See id.
In Henry I, we found nothing in the record before us, including the stipulation of settlement and the release, indemnity, and assignment, 6 which established that all, or even a portion, of the total settlement amount, or the total settlement payment, was paid on account of the loss of the plaintiffs' business reputation or the loss of their reputation as orchid growers. 7 Unlike Fabry v. Commissioner, 111 T.C. 305 (1998), revd. 223 F.3d 1261 (11th Cir. 2000), the Commissioner did not concede in Henry v. Commissioner, T.C. Memo 1999-205, vacated and remanded without published opinion 234 F.3d 34 (11th Cir. 2000), that all, or any portion, of the total settlement amount, or the total settlement payment, was paid on account of the loss of the plaintiffs' business reputation or the loss of their reputation as orchid growers. Furthermore, unlike the facts presented in Fabry, the record in Henry v. Commissioner, supra, did not establish (1) that throughout the trial in the lawsuit and/or throughout settlement discussions after the jury verdict in the lawsuit the plaintiffs had steadfastly presented claims for a specified dollar amount as damages for injury to their business reputation and injury to their reputation as orchid growers, (2) that du Pont never disputed the plaintiffs' claims for damages for injury to their business reputation and injury to their reputation as orchid growers throughout the lawsuit and/or those settlement discussions, (3) that du Pont sought and obtained a release specifically with respect to the plaintiffs' reputation claims, and (4) that du Pont would not have settled the lawsuit without a release of the plaintiffs' claims for damages for injury to their business reputation and injury to their reputation as orchid growers. But see Fabry v. Commissioner, 223 F.3d 1261, 1268-1269 n.21 (11th Cir. 2000); cf. supra note 3.
Although we found on the record presented to us in Henry I that petitioner had failed to establish that all, or any portion, of the $ 2,800,000 total settlement amount, or the $ 1,623,203 settlement payment, was paid by du Pont by reason of, or because of, the loss of the plaintiffs' business reputation or the loss of their reputation as orchid growers, we nonetheless addressed petitioner's contention that "Damage to reputation is clearly personal injury for the purpose of IRC section 104(a)(2)". We considered that contention solely "for the sake of completeness". Henry v. Commissioner, 77 T.C.M. (CCH) at 2222, 1999 T.C.M. (RIA) 99205. We did not address that contention of petitioner because we needed to do so in order to resolve the issue presented under section 104(a)(2) regarding the $ 1,623,203 settlement payment, and we expressly so stated in our opinion. See id. As we understood petitioner's position in Henry I, petitioner was contending that damage to reputation is, as a matter of law, personal injury within the meaning of section 104(a)(2). We noted that we had rejected such an argument in Fabry v. Commissioner, 111 T.C. 305 (1998), and we rejected any such argument in Henry I. See id.
We then described our approach and analysis in Fabry I and applied the same approach and analysis in Henry I. We stated in Henry I:
ASSUMING ARGUENDO THAT THE $ 1,623,203 SETTLEMENT PAYMENT WHICH
PETITIONER RECEIVED FROM DU PONT DURING 1994 HAD BEEN PAID FOR
LOSS OF HIS BUSINESS REPUTATION AND LOSS OF HIS REPUTATION AS AN
ORCHID GROWER, that payment was not made on account of personal
injuries within the meaning of section 104(a)(2). [Emphasis
added.]
Henry v. Commissioner, 77 T.C.M. (CCH) at 2224, 1999 T.C.M. (RIA) 99205.
However, as discussed above, we did not find on the record presented to us in Henry I that the $ 1,623,203 settlement payment was paid for loss of petitioner's business reputation or loss of his reputation as an orchid grower. Instead, we found on that record that
petitioner has failed to establish that all or any portion of
the $ 2,800,000 total settlement amount, or the $ 1,623,203
settlement payment, was paid by reason of, or because of, the
loss of the plaintiffs' business reputation or the loss of their
reputation as orchid growers.
Henry v. Commissioner, 77 T.C.M. (CCH) at 2222, 1999 T.C.M. (RIA) 99205. In light of the above-quoted finding that we made in Henry I, we do not believe that the Court of Appeals' opinion in Fabry II requires us to change our finding in Henry I that, on the record before us in this case, petitioner failed to establish that the $ 1,623,203 settlement payment that he received during 1994 was made on account of personal injuries within the meaning of section 104(a)(2), as construed by the Supreme Court in Commissioner v. Schleier, 515 U.S. 323, 132 L. Ed. 2d 294, 115 S. Ct. 2159 (1995), and cases decided after Schleier. 8
We have carefully considered each of the remaining issues that we decided in Henry I. We conclude that nothing in Fabry II requires us to change our findings as to any of those other issues.
On careful reconsideration pursuant to the mandate of the Court of Appeals,
Decision will be entered for the same years in the same amounts as previously entered in this case.