Stepp v. Commissioner

Laura Stepp (plaintiff) worked for the Transportation Security Administration (TSA) as a baggage screener. While on the job, Stepp suffered a serious shoulder injury. Stepp requested and received workers’ compensation for that injury and later returned to work. Shortly thereafter, TSA began involuntarily reassigning female baggage screeners to passenger screening. Stepp was among those reassigned. Stepp made several requests to remain in baggage screening and sought reasonable accommodations due to her shoulder injury and resulting limited mobility. TSA denied these requests and subjected Stepp to a hostile work environment. Stepp filed a formal complaint with the United States Equal Employment Opportunity Commission (EEOC), alleging discrimination, harassment, retaliation, and a hostile work environment. The EEOC found that TSA had retaliated against Stepp for engaging in protected activity and had created a hostile work environment, causing Stepp emotional harm and stress. Stepp did not allege, and the EEOC did not find or address, any physical injury beyond noting that Stepp’s prior shoulder injury established her status as a disabled individual. Stepp later settled with TSA for $121,500, along with nonmonetary relief, including reassignment to baggage screening and expungement of her employee record. The settlement agreement did not reference any physical injury or personal illness. On her federal income tax return for that year, Stepp reported the settlement payment as income but deducted the full amount as a personal-injury reimbursement. The commissioner of the Internal Revenue Service (defendant) disallowed the deduction. Stepp petitioned the tax court for a redetermination.