Stadnyk v. Commissioner

In 1996, Brenda Stadnyk (plaintiff) purchased a used car from Nicholasville Road Auto Sales, Inc. (the car dealership). Stadnyk tendered partial payment using a check from her checking account at Bank One, Kentucky, N.A. (the bank). The car broke down almost immediately, and Stadnyk placed a stop-payment order on the check with the bank. However, the bank returned the check to the car dealership erroneously labeled “NSF” for insufficient funds. The car dealership reported Stadnyk to the police for passing a worthless check, and she was arrested at her home. Stadnyk was transported to jail, where she underwent the booking process, including being required to undress in front of officers. Stadnyk was not physically assaulted or injured in the process. The charges against Stadnyk were ultimately dropped, and Stadnyk initiated a civil lawsuit against the car dealership and the bank alleging various claims, including malicious prosecution and false imprisonment. In 2002, the bank agreed to settle Stadnyk’s claims for $49,000. Stadnyk did not report the settlement as gross income, and the commissioner of internal revenue (defendant) issued a notice of deficiency, which the tax court sustained. On appeal, Stadnyk argued: (1) that the settlement proceeds should not be classified as taxable income because the damages were compensatory, and thus she did not enjoy an accession to wealth as contemplated by Internal