T.C. Memo. 1997-315
UNITED STATES TAX COURT
FERDINAND A. & MARLA MORABITO, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 10687-95, 15202-95, Filed July 9, 1997.
15203-95, 15204-95.
Edward J. Shapiro, for petitioners.
Patricia A. Riegger, for respondent.
MEMORANDUM OPINION
RAUM, Judge: The Commissioner determined deficiencies in
petitioners' 1992 Federal income taxes as follows:
1
Cases of the following petitioners are consolidated
herewith: William J. Prechtl and Roberta E. Prechtl, docket No.
15202-95; Joseph J. Chiffone, docket No. 15203-95; Douglas R.
Gamble and Joan A. Gamble, docket No. 15204-95.
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Petitioners Deficiency
Ferdinand A. and Marla Morabito $19,462
Joseph J. Chiffone 13,982
Douglas R. and Joan A. Gamble 30,288
William J. and Roberta E. Prechtl 21,248
This matter is before the Court on Respondent's Motions for
Summary Judgment pursuant to Rule 121.2 In each case,
petitioners submitted in opposition a so-called "Petitioner's
Opposition Motion", which was filed simply as "Petitioner's
Opposition". The cases were consolidated, and each presents the
same issue. That is, whether an amount paid to an employee of
IBM upon his severance therefrom conditioned upon his signing of
a release relinquishing all existing claims against IBM is
excludable from income under section 104(a)(2).
Petitioners are Ferdinand A. and Marla Morabito, Joseph J.
Chiffone, Douglas R. and Joan A. Gamble, and William J. and
Roberta E. Prechtl. Petitioners lived in Hicksville, NY,
Holbrook, NY, Locust Valley, NY, and Holtsville, NY,
respectively, when their petitions in these cases were filed.
References to petitioners will be to the male petitioners.
Prior to and during a portion of 1992, petitioners were
employees of IBM. In 1992, they each signed a document entitled
2
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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"General Release and Covenant Not to Sue" (the Release). In
exchange, they received a lump sum from IBM, consisting of 2
weeks' salary for every year of service. On their 1992 returns,
they each excluded the lump-sum payment from gross income. They
each attached Form 8275, Disclosure Statement, to their 1992
returns, asserting that the lump-sum amount was excluded because
it was "a payment reeived [sic] in exchange for the release
and/or settlement of tort-type rights, as part of the former
employer's ITO II Program."3
IBM instituted the ITO II Program as a method of reducing
its workforce. Employees who participated in the program
resigned or retired from IBM, receiving lump-sum cash payments
and other benefits in exchange for signing the Release. If an
ITO II participant was subsequently rehired by IBM or any of its
subsidiaries, he was required to repay a prorated portion of the
ITO II payment.
The Release provides in pertinent part:
In exchange for the sums and benefits which you will
receive pursuant to the terms of the Modified and
Extended Individual Transition Option Program (ITO II
Program), [individual petitioner] agrees to release
International Business Machines Corporation
(hereinafter "IBM") from all claims, demands, actions
or liabilities you may have against IBM which are
related to your employment with IBM or the termination
of that employment. * * * You also agree that this
release covers, but is not limited to, claims arising
3
In docket No. 15204-95, involving petitioners Douglas and
Joan Gamble, "reeived" was correctly shown as "received".
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from the Age Discrimination in Employment Act of 1967,
as amended, Title VII of the Civil Rights Act of 1964,
as amended, and any other federal or state law dealing
with discrimination in employment on the basis of sex,
race, national origin, religion, disability, or age.
You also agree that this release includes claims based
on theories of contract or tort, whether based on
common law or otherwise. * * *
* * * * * * *
You acknowledge and agree that:
1. The benefits provided pursuant to the ITO II
Program constitute consideration for this release, in
that there are benefits to which you would not have
been entitled had you not signed this release.
* * * * * * *
3. This release does not waive any claims you may have
which arise after the date you sign this release.
None of the petitioners filed a claim of any type against IBM
either prior to signing the Release or at any other time.
Section 104(a)(2) provides that "gross income does not
include * * * the amount of any damages received (whether by suit
or agreement and whether as lump sums or as periodic payments) on
account of personal injuries or sickness". Sec. 1.104-1(c),
Income Tax Regs. explains that the term "damages received" "means
an amount received * * * through prosecution of a legal suit or
action based upon tort or tort type rights, or through a
settlement agreement entered into in lieu of such prosecution."
Petitioners' "Oppositions" do not allege, nor does the record
otherwise show, that any petitioner ever made any formal or
informal claim against IBM. It therefore appears that there were
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no settlements for IBM and petitioners to reach. Petitioners
"waived all claims before asserting them, so this cannot be a
damage settlement by definition." Taggi v. United States, 835 F.
Supp. 744, 746 (S.D.N.Y. 1993), affd. 35 F.3d 93 (2d Cir. 1994).
However, even if we assume that the signed Releases
represent settlement agreements, for the awards to be excludable
under section 104(a)(2), petitioners must demonstrate (1) "that
the underlying cause of action giving rise to the recovery is
'based upon tort or tort type rights'" and (2) "that the damages
were received 'on account of personal injuries or sickness.'"
Commissioner v. Schleier, 515 U.S. 323, 337 (1995).
1. Underlying cause of action
The nature of the claim controls whether a damage amount is
excludable from gross income. Stocks v. Commissioner, 98 T.C. 1,
10 (1992). Determining the nature of the claim is a factual
matter. Sodoma v. Commissioner, T.C. Memo. 1996-275. If there
is no express language in the agreement explaining why the
settlement amount is being paid, the most important factor is
"the intent of the payor". Stocks v. Commissioner, supra.
The best indicator of the intent of the payor in this case
is the language of the Release. The Release freed IBM from "all
claims, demands, actions or liabilities you may have against IBM
which are related to your employment with IBM or the termination
of that employment." The Release covered ADEA claims, employment
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discrimination claims, and "claims based on theories of contract
or tort." The Release also provided that the benefits received
for signing "constitute consideration for this release, in that
there are benefits to which you would not have been entitled had
you not signed this release." This language indicates that IBM
considered the payments to petitioners as compensation for
release of all potential claims, including, but not limited to,
tort claims. This is supported by IBM's inclusion of each award
in petitioners' W-2 forms. There is nothing in the Release to
show that it was tailored to a specific incident or named
individual. The Release is so broad it covers any potential
existing claim; it is not designed to compensate for a specific
tort violation except incidentally.
2. Damages received
Petitioners must also demonstrate that "the damages were
received 'on account of personal injuries or sickness.'"
Commissioner v. Schleier, supra at 337 (quoting sec. 104(a)(2)).
Where a settlement agreement contains a number of claims, does
not allocate the portion excludable under section 104(a)(2), and
there is no other evidence that a specific claim was meant to be
singled out, the court must consider the entire amount taxable.
Taggi v. United States, supra at 746; Sodoma v. Commissioner,
T.C. Memo. 1996-275. Cf. Stocks v. Commissioner, supra at 17.
In this case, there was no division of the award by the parties.
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Petitioners have presented no evidence that a portion of the
award was intended to be excluded. Therefore, the entire amount
must be included in gross income.
Petitioners contend that they were singled out by IBM
because they could have filed age/job discrimination claims.
They contend that IBM purposely intimidated and harassed them in
order to reduce its work force; ultimately they were told to take
the buy-out or risk losing their jobs. They allege that they
were then forced to sign the Release before they were paid. The
ITO II Program paid 2 weeks per year of service versus 1 week per
year under IBM's existing ITO reduction in force program.
Petitioners claim that the additional week represented payment
for personal injury.
While petitioners may or may not have had actionable claims
against IBM, at issue here is the excludability of the ITO II
payments. When petitioners signed the Releases, they had not
brought suits against IBM. There is no evidence that they even
talked to IBM about doing so. Regardless of whether any of them
may have had a bona fide grievance against IBM, each accepted
IBM's offer, which IBM sweetened by adding an extra week's pay to
the formula for computing the amount payable. And although
petitioners may have thought they were settling claims, they
presented no evidence that IBM shared that belief. The ITO II
payments more fully resemble severance pay than settlements.
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This conclusion is supported by the Release itself, which was not
tailored specifically for petitioners, but was used generally for
the ITO II Program. See Keel v. Commissioner, T.C. Memo. 1997-
278; Webb v. Commissioner, T.C. Memo. 1996-50. It is also
supported by the amounts paid, which were based on years of
service rather than specific injury.
Petitioners also argue that IBM's actions caused personal
injuries to petitioners after they signed the Release. This
argument does not help petitioners, since the Release covered
only existing claims against IBM. Petitioner "agrees to release
[IBM] from all claims * * * you may have against IBM which are
related to your employment with IBM". (Emphasis added.) See id.
Petitioners have failed to demonstrate that a material issue
of fact remains for trial. They have not shown that the amounts
received under the ITO II program were paid in settlement of tort
claims, or that any portion was "received 'on account of personal
injuries or sickness.'" Commissioner v. Schleier, supra at 337
(quoting sec. 104(a)(2)).
Respondent's motions for
summary judgment will be
granted, and decisions will be
entered for respondent.