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physical injury, and so neither petitioner’s physical injury nor
medical expense could have been the basis for settlement.
On this record, we conclude that petitioner did not receive
the settlement proceeds on account of personal physical injuries
or physical sickness within the meaning of section 104(a)(2), as
amended by the SBJPA. We therefore hold that the entire
settlement amount is includable in petitioners’ gross income.
Addition to Tax and Penalty
Respondent determined an addition to tax for failure to file
timely under section 6651(a)(1) and an accuracy-related penalty
for substantial understatement or negligence or disregard of the
rules or regulations under section 6662(a). Respondent has the
burden of production under section 7491(c) for the addition to
tax and the penalty and must come forward with sufficient
evidence showing that they are appropriate. See Higbee v.
Commissioner, 116 T.C. 438, 446-447 (2001).
Respondent determined the addition to tax for late filing
because, although petitioners received a 4-month extension to
file their 1996 tax return, petitioners did not file until
January 15, 1998. The due date with the extension was August 15,
1997. Respondent has met his burden under section 7491(c) by
establishing petitioners’ late filing.
To avoid the addition to tax for filing a late return,
petitioners have the burden of proving that the failure to file
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