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Juanita M. Smallwood v. United States Government

December 28, 2012



The Court has received and considered all papers filed in support of and in opposition to the Government's Motion for Summary Judgment. The Motion is appropriate for resolution without a hearing. See Fed. R. Civ. P. 78; L.R. 7-15. The Court GRANTS the Government's Motion for Summary Judgment.


A. Procedural Background

On September 22, 2000, Plaintiff Juanita M. Smallwood filed a lawsuit against a fellow correctional officer, Ray Beltran, and the California Department of Corrections ("CDC"), for which she was a correctional officer, in the Superior Court for the State of California alleging (1) gender discrimination; (2) harassment on the basis of gender; (3) race discrimination; (4) harassment on the basis of race; (5) retaliation; (6) sex discrimination; and (7) discrimination and harassment in violation of public policy. (Statement of Genuine Issues of Material Fact in Opposition to MSJ ¶¶ 1, 2 ("SGI" (Doc. No. 31); Motion for Summary Judgment ("MSJ"), Ex. A.)

On August 6, 2002, the Superior Court denied the State's Motion for Summary Judgment, granted summary adjudication as to Ms. Smallwood's claims for race discrimination, harassment on the basis of race, sex discrimination in violation of the California Constitution, and discrimination and harassment in violation of public policy. (MSJ, Ex. B-4 at 1-2.) The Superior Court denied summary adjudication as to Ms. Smallwood's claims for gender discrimination, gender harassment, and retaliation. (Id. at 2.) Ms. Smallwood then filed her First Amended Complaint with the Superior Court, in which she alleged the same seven claims in her original complaint but added another correctional officer as a defendant. (See MSJ, Exs. C, D; SGI ¶ 14.) On January 16, 2004, Ms. Smallwood, the State, and the individual defendants entered into a settlement agreement ("Settlement Agreement" or "Agreement"). (MSJ, Ex. F.)

On January 5, 2012, Ms. Smallwood filed her complaint with this Court ("Complaint") alleging claims for damages in the form of a refund for the taxes she paid on her settlement proceeds pursuant to 26 U.S.C. § 104 and 26 U.S.C. § 6511. (Compl. (Doc. No. 1).) On May 30, 2012, Ms. Smallwood filed her First Amended Complaint ("FAC"), making the same claim but only under section § 104. (Doc. No. 15.)

On October 19, 2012, the State moved for summary judgment. (Motion for Summary Judgment ("MSJ") (Doc. No. 27).) Along with its Motion for Summary Judgment, the State filed a Statement of Uncontroverted Facts and Conclusions of Law (Doc. No. 27-2); Request for Judicial Notice ("RJN") requesting the Court to take notice of the Small Business Job Protection Act of 1996 and portions of the Act's legislative history (Doc. No. 28);*fn1 Declaration of Jean Rhee ("Rhee Declaration" (Doc. No. 27-1)); and various exhibits in support of the MSJ (Doc. No. 29).

On October 31, 2012, Ms. Smallwood filed a Memorandum of Points and Authorities in Opposition to Defendants' Motion for a Summary Judgment("Opp'n" (Doc. No. 30)), a Statement of Genuine Issues ("SGI" (Doc. No. 31)), and a Declaration in Opposition to the Motion for a Summary Judgment ("Smallwood Declaration" (Doc. No. 32)). The State filed its Reply on November 2, 2012. (Doc. No. 35.)


The following material facts are supported adequately by admissible evidence and are uncontroverted.*fn2 They are "admitted to exist without controversy" for the purposes of these motions. See L.R. 56-3 (facts not "controverted by declaration or other written evidence" are assumed to exist without controversy); Fed. R. Civ. P. 56(e)(2) (stating that where a party fails to address another party's assertion of fact properly, the court may "consider the fact undisputed for purposes of the motion").

In her state court complaint, Ms. Smallwood claims that from 1997 until she transferred to a different work site in 1999, she was stalked by fellow correctional officer Ray Beltran, resulting in emotional stress and poor physical health (MSJ, Ex. A; Smallwood Decl. at 7.) As a result of the alleged harassment and abuse from Ray Beltran and others, and from the alleged failure of CDC to intervene, Ms. Smallwood alleges that she suffered a variety of physical injuries and physical sickness of which the State was aware before it entered into the Settlement Agreement. (Smallwood Decl. ¶¶ 24, 52, 53.)

On January 16, 2004, Ms. Smallwood and the State entered into the out-of-court Settlement Agreement, pursuant to which the State disbursed $995,000.00 into a trust fund set up by Ms. Smallwood's attorney, Samuel J. Wells. (SGI ¶ 28.)

Although Mr. Wells and the States' attorneys had verbally agreed to deposit Ms. Smallwood's settlement into an annuity, Ms. Smallwood noticed after signing the Agreement that the annuity was not mentioned. (Smallwood Decl. ¶¶ 30-32.) Since the Agreement had been executed, Ms. Smallwood's attorneys informed her that the annuity portion could only be added into the settlement if she agreed to subtract $200,000.00 from the damages she had received. (Id.) Ms. Smallwood did not agree to these terms, and thus the issue of taxation went unresolved. (Id.)

Ms. Smallwood then consulted several accountants and members of the Internal Revenue Service ("I.R.S.") office in San Bernardino to ascertain if the settlement was excluded from taxation under Internal Revenue Code, section 104(a)(2). (Id. ¶¶ 36-38.) After consulting Jennifer Starbuck, a certified public accountant, Ms. Smallwood paid the Franchise Tax Board $42,885.00 and the United States Treasury $157,245.00 (Id. ¶ 40.) On May 8, 2008, Ms. Smallwood contacted the I.R.S. to request a tax refund. (Id. ¶ 43.)

After receiving no reply for five months, Ms. Smallwood met with members of the San Bernardino I.R.S. office who informed her that she would have to go before an Appeals Officer because she was requesting a full tax refund. (Id. ¶ 46.) On February 19, 2009, Ms. Smallwood met with an Appeals Officer, who denied her claim on the ground that her damages were awarded for employment discrimination, which did not qualify for tax exclusion under section 104(a)(2) (Id. ¶ 54.)


A court shall grant a motion for summary judgment when there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). The moving party must show that "under the governing law, there can be but one reasonable conclusion as to the verdict." Anderson, 477 U.S. at 250.

Generally, the burden is on the moving party to demonstrate that it is entitled to summary judgment. See Margolis v. Ryan, 140 F.3d 850, 852 (9th Cir. 1998) (citing Anderson, 477 U.S. at 256-57); Retail Clerks Union Local 648 v. Hub Pharmacy, Inc., 707 F.2d 1030, 1033 (9th Cir. 1983). The moving party bears the initial burden of identifying the elements of the claim or defense and evidence that it believes demonstrates the absence of an issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Because summary judgment is a "drastic device" that cuts off a party's right to present its case to a jury, the moving party bears a "heavy burden" of demonstrating the absence of any genuine issue of material ...

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