Kentucky residents Daniel and Brenda Stadnyk have endured the worst used-car experience of all time.
The good news is, the U.S. Tax Court this week determined the Stadnyks will not have to pay a $2,000 penalty on unpaid taxes. The bad news is, while Tax Court Judge Joseph Robert Goeke evinced clear sympathy for the Stadnyk's used-car nightmare, the couple is still on the hook for money owed.
Here's the back story. The Stadnyks were shopping for a car for their son, circa 1999. They bought a used 1990 Geo Storm from Nicholasville Road Auto Sales. Unfortunately, the car broke down several minutes after Daniel Stadnyk drove it off the lot. He spent $479 to repair it, and then tried contacting the car dealership. Noted Judge Goeke:
"Their calls were ignored, placed on hold for long periods of time and not returned."
Brenda Stadnyk placed a stop order on a $1,100 check used to buy the car. Unfortunately for her, Bank One screwed up and incorrectly stamped "insufficient funds" on the frozen check. The good folks at Nicholasville Road Auto Sales then filed a criminal complaint and had Mrs. Stadnyk arrested. Fayette County deputy sheriffs handcuffed her, hauled her to jail, photographed her, searched her, undressed her and stuffed her in an orange jail jumpsuit. Charges were later dropped.
The Stadnyks subsequently sued the used auto dealers and Bank One. The former suit was settled for unspecified terms while Bank One settled with a written apology and a $49,000 payment. And then, based on what several attorneys -- including Bank One's -- told them about the nature of mediation agreements, the Stadnyks filed a tax return without declaring the $49,000 as income. Turns out, the attorneys were wrong and the mediation settlement was, in fact, reportable income. That's because some sort of physical injury -- and not just emotional distress, like the kind that drove Mrs. Stadnyk to see a therapist after her unfounded arrest -- is required for a mediation settlement to be exempt from tax. Congress set that limit in 1996, overturning some court opinions in doing so, and reasoned the judge:
"Being subjected to police arrest procedures may cause physical discomfort. However, being handcuffed or searched is not a physical injury."
Taxed owed as a result: $13,119.