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The agreement also set aside $1 million to the investor and $5 million to Mr. Green’s attorneys.

IRS battles begin

It was the details of the release and settlement agreement that pitted Mr. Green against the IRS.

Between 1991 and 1995, while engaged in full-time efforts to collect the judgment, Mr. Green said his health deteriorated, requiring a number of hospitalizations for a bleeding peptic ulcer, anemia and other problems.

As a result, he said, he did not include the $3.4 million lump-sum payment on his 1995 federal income taxes because it fell under an IRS code providing an exclusion from taxation for “damages received — on account of personal injury or sickness.”

Mr. Green said he did report $285,000 of the monthly payments as taxable income but not $483,000 because it represented additional damages that were excluded from taxation under the tax code. He said the bulk of the settlement was not taxable because the money was awarded to compensate him for physical and other damages.

During the tax trial, Dr. Richard E. Coons testified that Mr. Green suffered from depression and post-traumatic stress disorder; that the actions of Human Services caused these conditions; and that the injury would be permanent. He described the symptoms as including compulsive eating, anxiety, crying, decreased confidence, difficulty concentrating and great sleep disturbance.

“As of today, justice has been denied. I have been forced to accept the hard, cold, cruel truth — people like me have little or no chance for any justice in this country,” Mr. Green said. “What is a person to do if confronted with the cold truth? I have decided to stand on it. The truth is clear and visible for all to see.

“No one should be denied their constitutional right of a fair trial.”

But the IRS challenged Mr. Green’s tax payments, saying all of the money he received from 1995 through 1999 was taxable income. The agency also disallowed losses he claimed in those years and a $100,000 itemized deduction he sought in 1999. In addition, the IRS said Mr. Green owed more than $1 million in penalties for all of the years.

According to the IRS, Mr. Green’s negotiated settlement limited as nontaxable only the $3.4 million he received as the first lump-sum payment — $2.5 million for past and future mental anguish and $900,000 for loss of earning capacity. The IRS said Mr. Green had failed to show that any of the additional damages were awarded for personal injuries or sickness.

“Although there is substantial evidence that the petitioner suffered mental and physical deterioration between the time of the judgment in 1991 and the settlement in 1995, there is no allocation — for any additional injuries,” the IRS said in an October 2005 filing in the U.S. Tax Court in San Antonio.

The challenge meant that Mr. Green, according to the IRS, had failed to pay taxes on $10 million of the jury awarded judgment.

Mr. Green challenged the ruling, and while the Tax Court agreed that the $3.4 million cash award was not taxable it upheld the government’s claim on the rest of the settlement. The court said Mr. Green owed $3.2 million in federal taxes and penalties. The IRS already had seized $3.5 million, some three years later returning $300,000 as the difference between the court settlement and the amount of assets seized.

The tax court order was appealed by Mr. Green to the U.S. 5th Circuit Court of Appeals in New Orleans, where a three-judge appeals court panel — Judges Will Garwood, E. Grady Jolly and Carl E. Stewart — said that while the settlement language was “less than clear,” Mr. Green had failed to prove the agreement’s dollar amount did not limit the amount he was to be paid for personal injuries or sickness.

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