T.C. Memo. 1997-336
UNITED STATES TAX COURT
JULIUS R. PHILLIPS AND MARCIA G. PHILLIPS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7996-96. Filed July 24, 1997.
Michael Hinchion, for petitioners.
Edsel Ford Holman, Jr., for respondent.
MEMORANDUM OPINION
PARR, Judge: This case is before us on the parties' cross-
motions for summary judgment under Rule 121.1 Respondent
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
otherwise indicated. All dollar amounts are rounded to the
(continued...)
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determined a deficiency in petitioners' Federal income tax in the
amount of $30,920 for the taxable year 1992. The term
"petitioner" refers to Julius R. Phillips.
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 Nashville, Tennessee.
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)
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 based on the pleadings, facts
stipulated by the parties, and other pertinent materials in the
record. These facts are stated solely for purposes of deciding
the cross-motions. The stipulation of facts and the exhibits
attached thereto are incorporated herein by this reference.
Background
Petitioner was employed by International Business Machines
Corp. (IBM) for 28 years from September of 1964 through July of
1992. During that period, petitioner was assigned by IBM to
various locations around the world and was regularly promoted.
At the time petitioner ceased his employment with IBM, he was 50
years old.
In October of 1971, petitioner suffered a massive heart
attack and did not return to work until March of 1972. In
January of 1981, petitioner suffered a heart/ventricular aneurysm
while on a business trip and was subsequently hospitalized for
heart surgery. He returned to work in May of 1981. In September
of 1989, petitioner suffered another heart attack while away on
business but returned to work 10 days later. After the last of
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these heart attacks, petitioner was no longer assigned by IBM to
foreign locations, nor was he promoted.
Prior to July 31, 1992, IBM declined petitioner's request to
participate in an executive training program (training program)
that petitioner believed would have insured his continued
employment with IBM at the same or a higher job level.
Petitioner believed that IBM's decision was at least partially
motivated by his age and health status.
On May 20, 1992, petitioner met with his executive
supervisor, Bjorn Andersen (Andersen), regarding his employment
situation, at which time he renewed his request to participate in
the training program. Andersen agreed to support a renewed
request on petitioner's behalf but indicated that it would likely
again be denied. During the meeting, Andersen informed
petitioner that his position at IBM likely would be eliminated
or, at a minimum, substantially downgraded, and therefore urged
that petitioner should "strongly consider" participating in IBM's
Modified and Extended Individual Transition Option Program (ITO
II Program), an early retirement or severance program, which
allows IBM employees to resign or retire early, receiving lump-
sum payments and other benefits. Andersen stressed the
importance of participating in the ITO II Program to ensure
petitioner's continued eligibility for health and other benefits,
which might not be available to petitioner in the event his
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employment was terminated after the expiration of the ITO II
program. Petitioner perceived Andersen's recommendation as a
form of ultimatum. Out of concern that he would be terminated
without further benefits, petitioner agreed to participate in the
ITO II program.
As a condition of receiving the lump-sum payment and
benefits pursuant to the ITO II program, petitioner was required
to sign a General Release and Covenant Not to Sue (the release).
Petitioner signed the release on July 31, 1992. The release is
broadly written and covers any and all possible and potential
claims in contract or in tort arising from employment or
termination of employment, including any claims against IBM
arising under the Americans with Disabilities Act. Americans
with Disabilities Act of 1990 (ADA), Pub. L. 101-336, sec. 2, 104
Stat. 328 (current version at 42 U.S.C. sec. 12101 (1994)); Civil
Rights Act of 1991, Pub. L. 102-166, sec. 102, 105 Stat. 1072
(current version at 42 U.S.C. sec. 1981a (1994)). 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], J. Ray Phillips[2] (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
2
The name J. Ray Phillips was typewritten in a blank space
provided in the release.
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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 the time of signing the release petitioner had no legal
claims pending against IBM for unlawful employment practices.3
Petitioner, however, thought that he had a claim against IBM
pursuant to the ADA for compensatory and punitive damages, as
well as damages for emotional distress, as a result of its
alleged discriminatory treatment of him.
In exchange for signing the release and participating in the
ITO II Program, petitioner received a $94,174 lump-sum payment
(the payment or ITO payment). The payment amount for each
3
Although petitioner did not file any legal claims against
IBM prior to signing the release, he did make verbal complaints
to Andersen, his supervisor, at a meeting which took place on May
20, 1992.
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participant in the ITO II Program was calculated using the same
mathematical formula based on years of service.
For the year 1992 petitioner received a Form W-2 from IBM
showing wages, tips, and other compensation of $218,329.
Petitioners attached a disclosure statement to their 1992 return,
asserting that the $94,174 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);
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
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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 tort type 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
(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 335. The claim
must be bona fide, but not necessarily valid; i.e., sustainable.
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Robinson v. Commissioner, supra at 126; Stocks v. Commissioner,
supra at 10; Sodoma v. Commissioner, T.C. Memo. 1996-275 (citing
Taggi v. United States, 35 F.3d 93, 96 (2d Cir. 1994)). In this
connection, 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.
Moreover, while the claim need not have been previously asserted,
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. Sodoma v. Commissioner, T.C.
Memo. 1996-275; see also Keel v. Commissioner, T.C. Memo. 1997-
278; Foster v. Commissioner, T.C. Memo. 1996-26.
Petitioner asserts that he had a bona fide claim against IBM
pursuant to the ADA for infliction of emotional distress, and
therefore IBM accepted his ITO II Program participation request
and subsequent release in lieu of litigation. In so arguing,
petitioner places heavy reliance on the Supreme Court's decision
in Commissioner v. Schleier, supra. In Schleier, the Supreme
Court noted that "one of the hallmarks of traditional tort
liability is the availability of a broad range of damages to
compensate the plaintiff fairly for injuries caused by the
violation of his legal rights." Id. at 335 (citing United States
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v. Burke, supra at 235. Petitioner asserts that the ADA provides
for a broad range of tortlike remedies, as contemplated by
Schleier. An aggrieved employee bringing a claim under the ADA
is entitled to seek compensatory and punitive damages, as well as
damages for emotional pain, suffering, inconvenience, mental
anguish, loss of enjoyment of life, and other nonpecuniary
losses. 42 U.S.C. sec. 1981a(b). Moreover, petitioner asserts
that IBM was aware of such claims, because he complained to his
supervisor of the grievances he had against IBM for such
employment discrimination.4
Respondent contends that before petitioner executed the
release, he presented his complaints only orally and only to his
supervisor. Respondent argues that petitioner's failure to send
IBM a written letter, to seek legal advice, or to lodge any
formal tortlike claim against IBM prior to and at the time of
signing the release establishes that there was no bona fide
4
At a meeting with his supervisor, petitioner protested that it
would be unfair for IBM to force him out of the company given his
long record of outstanding service. Petitioner said that he was
being targeted for separation from the company due to his age and
serious health condition, which was known to IBM. Petitioner
stated that he felt pressured into signing the release to the
extent that he was made to fear losing his health benefits and to
the extent that it was implied that he had no future at IBM. Due
to his long history of heart-related problems, the prospect of
losing health coverage was extremely threatening to petitioner,
as he was then uninsurable. Thus, it was petitioner's contention
that IBM had illegally discriminated against him and that he
sustained personal injuries from being denied access to the
executive training program and from his early termination, in the
form of physical, mental, and emotional pain and suffering.
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dispute between petitioner and IBM that could provide the basis
for settlement.
We agree with petitioner that an employee is not required
to file a formal legal action against an employer prior to
settling an existing claim in order to exclude such a settlement
payment from income under section 104(a)(2). Sodoma v.
Commissioner, supra. Viewing the facts in the light most
favorable to petitioner, it can be argued that petitioner's act
of informing his supervisor of his complaints against IBM is at
least some evidence of an existing dispute between the parties
that could have provided the basis for settlement. Moreover, we
tend to agree with petitioner that the ADA provides for a broad
range of tortlike remedies as discussed by the Supreme Court in
both Burke and Schleier. Thus, we find, for purposes of this
motion only, that petitioner has met the first prong of
excludability under section 104(a)(2) in that he has established
the existence of an underlying tort-type cause of action. See
Commissioner v. Schleier, 515 U.S. 323 (1995); see also Taggi v.
United States, supra at 96 (a claim must be bona fide, but does
not necessarily have to be sustainable or valid).
We now turn to the language of the release itself. The
release in this case is the same as that 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
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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 pursuant to the ADA. 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. Here, respondent argues, and we
agree, that IBM did not make the payment on account of a personal
injury. The release form appears to be a standard document used
by IBM for all of its employees who participate in the ITO II
Program. Moreover, IBM calculated the amount of the $94,174
lump-sum payment received by petitioner using the same
mathematical formula for each participant in the ITO II Program
based on the participant's individual years of service. 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 Sodoma v. Commissioner, T.C. Memo. 1996-275, and
Webb v. Commissioner, supra, the lump-sum payment herein appears
to have been severance pay rather than a payment for personal
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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 tort-type 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 $94,174 was based on
petitioner's years of service points in the direction of its
having been severance pay rather than a payment for personal
injury. See Webb v. Commissioner, supra, which involved the same
payor and substantially the same plan as involved herein.
In sum, we conclude that there is no material issue of fact
which requires a trial. Accordingly, we hold that respondent's
motion for summary judgment will be granted and petitioners'
motion for summary judgment will be denied.
To reflect the foregoing,
An appropriate order and decision
will be entered granting respondent's
motion for summary judgment and denying
petitioners' motion for summary
judgment.