T.C. Memo. 1997-345
UNITED STATES TAX COURT
JOSEPH J. AND LILLIAN A. GAJDA, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2210-97. Filed July 28, 1997.
Leonard L. Leighton, for petitioners.
Elizabeth A. Owen, for respondent.
MEMORANDUM OPINION
PARR, Judge: This case is before us on respondent's motion
for summary judgment under Rule 121.1 Respondent determined a
1
All section references are to the Internal Revenue Code in
effect for the taxable year in issue, and all Rule references are
to the Tax Court Rules of Practice and Procedure, unless
(continued...)
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deficiency in petitioners' Federal income tax of $33,343 for the
taxable year 1993. The term "petitioner" refers to Joseph J.
Gajda.
The issue for decision is whether petitioner may exclude
from gross income under section 104(a)(2) amounts received from
his employer upon termination of his employment on the ground
that such amounts represented damages received on account of
personal injury. At the time the petition in this case was
filed, petitioners resided in Round Rock, Texas.
A motion for summary judgment is appropriate "if the
pleadings, answers to interrogatories, depositions, admissions,
and any other acceptable materials, together with the affidavits,
if any, show that there is no genuine issue as to any material
fact and that a decision may be rendered as a matter of law."
Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520
(1992), affd. 17 F.3d 965 (7th Cir. 1994). The moving party
bears the burden of proving that there is no genuine issue of
material fact, and factual inferences are viewed in the light
most favorable to the nonmoving party. United States v. Diebold,
Inc., 369 U.S. 654, 655 (1962); Preece v. Commissioner, 95 T.C.
594, 597 (1990). The opposing party cannot rest upon mere
allegations or denials, but must set forth specific facts showing
1
(...continued)
otherwise indicated. All dollar amounts are rounded to the
nearest dollar, unless otherwise indicated.
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there is a genuine issue for trial. Rule 121(d). The existence
of any reasonable doubt as to the facts will result in denial of
the motion for summary judgment. Hoeme v. Commissioner, 63 T.C.
18, 20 (1974).
The facts presented below are stated solely for purposes of
deciding respondent's motion for summary judgment.
Background
Prior to and during a portion of 1993, petitioner was
employed by International Business Machines Corp. (IBM). At the
time petitioner ceased his employment with IBM, he was over 40
years old.
At some time during 1993, petitioner became eligible to
participate in the IBM Modified and Extended Individual
Transition Option Program (ITO II Program). The ITO II Program
allows IBM employees to resign or retire early, receiving lump-
sum payments and other benefits. Petitioner was required to sign
a General Release and Covenant Not to Sue (the release) as a
condition for the sums and benefits, including the lump-sum
payment pursuant to the ITO II program.2 The release is broadly
2
Petitioners' counsel has failed to provide respondent with a
copy of the release signed by petitioner. Respondent attached to
his memorandum of authorities submitted to this Court a copy of
the release used by IBM in the ITO II program. Petitioner did
not contest the submission of the release in petitioner's
response to respondent's motion for summary judgment. In fact,
petitioner refers to the release as if it is the release
petitioner signed. Thus we treat it as such.
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written and covers any and all possible and potential claims in
contract or in tort arising from employment or termination of
employment. Pertinent sections of the release read as follows:
In exchange for the sums and benefits which you
will receive pursuant to the terms of the * * * [ITO II
Program], (Name of Individual) (hereinafter "you")
agrees to release * * * [IBM] from all claims, demands,
actions or liabilities you may have against IBM of
whatever kind, including but not limited to those 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 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. This release does not include
your vested rights, if any, in the IBM Retirement Plan,
which survive unaffected by this release.
* * * * * * *
6. In the event of rehire by IBM or any of its
subsidiaries as a regular employee, you understand
that IBM reserves the right to require repayment
of a prorated portion of the ITO II Program
payment. The amount of repayment will be based on
the number of weeks off the IBM payroll compared
with the number of weeks' salary used to calculate
your payment.
At some time during 1993, petitioner signed the release. At
the time of signing the release petitioner had no legal claims
for unlawful employment practices pending against IBM, nor had he
lodged any informal complaints against the company. Petitioner,
however, thought that he was forced by IBM to leave the company
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and therefore had a claim against IBM for age discrimination and
emotional distress.
In exchange for signing the release and participating in the
ITO II Program, petitioner received a $91,690 lump-sum payment
(the payment or ITO payment). The payment was based on years of
service and rate of pay.
For the year 1993 petitioner received a Form W-2 from IBM
showing wages, tips, and other compensation as $228,290.3 On
April 15, 1994, petitioners filed a 1993 joint Federal income tax
return. Petitioners reported the $228,290 as wages, subtracted
the $91,690 ITO payment therefrom, and attached a disclosure
statement to their return, asserting that the ITO payment is
excludable from gross income pursuant to section 104(a)(2) as a
payment received in exchange for the release and settlement of
tortlike rights. Respondent determined that the ITO payment was
fully taxable severance pay.
Discussion
Except as otherwise provided, gross income includes income
from all sources. Sec. 61(a); Commissioner v. Glenshaw Glass
Co., 348 U.S. 426 (1955). While section 61(a) is to be broadly
construed, statutory exclusions from income are narrowly
construed. Commissioner v. Schleier, 515 U.S. 323, 328 (1995);
3
On July 2, 1996, petitioners filed an amended return on
which they excluded the $91,690 from gross income.
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Kovacs v. Commissioner, 100 T.C. 124, 128 (1993), affd. without
published opinion 25 F.3d 1048 (6th Cir. 1994).
Under section 104(a)(2), 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". Section 1.104-1(c), Income Tax
Regs., provides:
(c) Damages received on account of personal
injuries or sickness.--* * * The term "damages
received (whether by suit or agreement)" 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.
Thus, an amount may be excluded from gross income only when
it was received both: (1) Through prosecution or settlement of
an action based upon tort or tortlike rights; and (2) on account
of personal injuries or sickness. Commissioner v. Schleier,
supra; Wesson v. United States, 48 F.3d 894, 901-902 (5th Cir.
1995); Bagley v. Commissioner, 105 T.C. 396, 416 (1995).
Where damages are received pursuant to a settlement
agreement, the nature of the claim that was the actual basis for
settlement controls whether such damages are excludable under
section 104(a)(2). United States v. Burke, 504 U.S. 229, 237
(1992); Thompson v. Commissioner, 866 F.2d 709, 711 (4th Cir.
1989), affg. 89 T.C. 632 (1987); Robinson v. Commissioner, 102
T.C. 116, 126 (1994), affd. in part and revd. in part 70 F.3d 34
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(5th Cir. 1995). "[T]he critical question is, in lieu of what
was the settlement amount paid?" Bagley v. Commissioner, supra
at 406.
Determination of the nature of the claim is factual. Id.;
Stocks v. Commissioner, 98 T.C. 1, 11 (1992). The first
requirement is the existence of a claim based upon tort or tort
type rights. Commissioner v. Schleier, supra at 331. The claim
must be bona fide, but not necessarily valid; i.e., sustainable.
Sodoma v. Commissioner, T.C. Memo. 1996-275 (citing Taggi v.
United States, 35 F.3d 93, 96 (2d Cir. 1994)); Robinson v.
Commissioner, supra at 126; Stocks v. Commissioner, supra at 10.
In this connection, we note that we have held that claims for
potential future personal injuries do not qualify for exclusion
under section 104(a). Roosevelt v. Commissioner, 43 T.C. 77
(1964); Starrels v. Commissioner, 35 T.C. 646 (1961), affd. 304
F.2d 574 (9th Cir. 1962). Such holdings imply that there must be
an existing claim.
Petitioner asserts that IBM was engaging in systematic
discrimination against employees over the age of 40, that he was
forced to leave the company because of his age, that as a result
he has been diagnosed as having a "major depression" for which he
is presently under psychiatric care, and that age discrimination
was the primary concern of IBM in requiring petitioner to sign
the release. Therefore, petitioner contends that IBM accepted
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his ITO II Program participation request and subsequent release
in lieu of litigation.
Respondent argues, pursuant to Commissioner v. Schleier,
supra, that even if petitioner could establish an underlying
cause of action for age discrimination, a payment made pursuant
to the Age Discrimination in Employment Act of 1967 is not
excludable from income under section 104(a)(2). Age
Discrimination in Employment Act of 1967 (ADEA), Pub. L. 90-202,
81 Stat. 602 (current version at 29 U.S.C. secs. 621-634 (1994)).
Petitioner, however, has not limited his arguments to claims
brought against IBM under the ADEA. Rather, petitioner asserts
that he released IBM from liability for "potential tort claims",
which would include both a claim for age discrimination under the
ADEA and a common law cause of action for emotional distress. To
support his position, petitioner relies on Commissioner v.
Schleier, supra at 332 n.6, for the proposition that "intangible
harms of discrimination can constitute personal injury, and that
compensation for such harms may be excludable under §104(a)(2)."
Viewing the facts in the light most favorable to petitioner,
it can be argued that petitioner had a potential tortlike claim
for infliction of emotional distress. Thus, we assume, for
purposes of this motion only, that petitioners have met the first
prong of excludability under section 104(a)(2).
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We now turn to the language of the release itself. The
release in this case is the same as that in Brennan v.
Commissioner, T.C. Memo. 1997-317, and in Webb v. Commissioner,
T.C. Memo. 1996-50, and essentially the same as that in Sodoma v.
Commissioner, supra. By its terms, petitioner released IBM from
liability for both contract and tort claims. The release,
however, does not specifically indicate that the lump-sum payment
received by petitioner was paid to settle a potential personal
injury claim against IBM. We note that where the settlement
agreement lacks express language stating what the settlement
amount was paid to settle, then the most important factor is the
intent of the payor. Knuckles v. Commissioner, 349 F.2d 610, 612
(10th Cir. 1965), affg. T.C. Memo. 1964-33; Stocks v.
Commissioner, supra at 10. Respondent argues that petitioner's
failure to lodge any informal or legal tortlike claim against IBM
prior to and at the time of signing the release establishes that
there was no bona fide dispute between petitioner and IBM that
could provide the basis for settlement.
To prevail under section 104(a)(2), petitioner is not
required to have asserted a legal claim against IBM prior to
signing the release; however, the absence of any knowledge of the
claim on the part of the employer-payor obviously has a negative
impact in determining the requisite intent of the payment.
Brennan v. Commissioner, supra; Sodoma v. Commissioner, supra;
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see also Keel v. Commissioner, T.C. Memo. 1997-278; Foster v.
Commissioner, T.C. Memo. 1996-26. Respondent further argues
that IBM did not make the payment on account of a personal
injury. The release form is a standard document used by IBM for
all of its employees who participate in the ITO II Program.
Moreover, the amount of the $91,690 lump-sum payment was
calculated on the number of years of service and petitioner's
salary. Finally, the release states that if petitioner were
rehired by IBM, he could be required to repay some portion of the
lump-sum payment based on the number of weeks off the IBM payroll
compared with the number of weeks' salary used to calculate the
lump-sum payment. As in Brennan v. Commissioner, supra, Sodoma
v. Commissioner, supra, and Webb v. Commissioner, supra, the
lump-sum payment herein appears to have been severance pay rather
than a payment for personal injury. Severance pay, just like the
pay it replaces, is taxable income.
Finally, we note that petitioner has not alleged or come
forward with any evidence of the specific amounts of the payments
allocable to claims of tort or tortlike damages for personal
injuries. The release makes no allocation, and petitioner has
not set forth any facts upon which he would rely to prove an
allocation. Indeed, the fact that the $91,690 was based on years
of service and rate of pay points in the direction of its having
been severance pay rather than a payment for personal injury.
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See Brennan v. Commissioner, supra, which involved the same payor
and the same plan as involved herein.
In sum, viewing the facts in a light most favorable to
petitioner, we conclude that respondent has made a prima facie
case to support a motion for summary judgment and that petitioner
has failed to come forward with countervailing assertions having
sufficient specificity to cause us to hold that there is any
material issue of fact which requires a trial. Accordingly, we
hold that respondent's motion for summary judgment will be
granted.
To reflect the foregoing,
An appropriate order and decision
will be entered granting respondent's
motion for summary judgment.