T.C. Memo. 1997-434
UNITED STATES TAX COURT
ALLEN L. AND DIANE A. CAREY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1670-96. Filed September 23, 1997.
Allen L. and Diane A. Carey, pro se.
Howard P. Levine, for respondent.
MEMORANDUM OPINION
TANNENWALD, Judge: Respondent determined a deficiency in
petitioners' Federal income tax in the amount of $27,901 for the
taxable year 1993.
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This case is before us on respondent's motion for summary
judgment under Rule 121.1 The issue for decision is whether
petitioners may exclude from gross income, under section
104(a)(2), amounts received from petitioner Allen L. Carey's
employer, International Business Machines Corp. (IBM), upon
termination of his employment, on the ground that such amounts
represented damages received on account of personal injury.
The disposition of a motion for summary judgment under Rule
121 is controlled by the following principles: (1) The moving
party must show the absence of a dispute as to any material fact
and that a decision may be rendered as a matter of law; (2) the
factual materials and the inferences to be drawn from them must
be viewed in the light most favorable to the party opposing the
motion; and (3) the party opposing the motion cannot rest upon
mere allegations or denials but must set forth specific facts
showing there is a genuine issue for trial. Rule 121; Brotman v.
Commissioner, 105 T.C. 141, 142 (1995).
Petitioners resided in Tampa, Florida, at the time they
filed their petition.
Petitioner Allen L. Carey (Mr. Carey) was employed by Skill
Dynamics, part of IBM, until his termination in 1993. He
received a lump-sum payment of $85,702.54 from IBM in June of
1
Unless otherwise indicated, all statutory 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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1993 (the lump-sum payment) in connection with his termination.
The lump-sum payment was termed "separation pay" by IBM, and the
amount of the lump-sum payment was based on length of service and
salary.
On June 30, 1993, Mr. Carey signed a General Release and
Covenant Not to Sue (the release) as a condition for the sums and
benefits, including the lump-sum payment, he received pursuant to
the terms of the Skills Dynamics Transition Program (SDTP
Program) offered by IBM. 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 * * * [SDTP
Program], ALLEN CAREY (hereinafter "you") agrees to
release * * * [IBM] and its benefits plans 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,
the termination of that employment or other severance
payments or your eligibility or participation in the
Retirement Bridge Leave of Absence. * * * 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, state or local law dealing with discrimination
in employment, including but not limited to
discrimination based on sex, race, national origin,
religion, disability, veteran status 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 agreement covers both claims that you know
about and those that you may not know about which have
accrued by the time you execute this release. This
release does not include your nonforfeitable rights to
your accrued benefits * * * , as of the date of your
retirement from IBM under the IBM Retirement Plan and
the IBM Tax Deferred Savings Plan, which are not
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released hereby but survive unaffected by this
document.
* * * * * * *
3. This release does not waive any claims that
you may have which arise after the date you sign this
release.
* * * * * * *
5. 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 SDTP. The amount of repayment
will be calculated as one week of pay at the rate used
to calculate the SDTP, multiplied by the difference
between the number of weeks used to calculate the SDTP
and the number of weeks away from IBM, less associated
payroll taxes withheld by IBM.
Mr. Carey was 55 years of age in June 1993. For many years,
Mr. Carey had, and in 1993 continued to have, a hearing
impairment for which he wore a hearing aid and was, and in 1993
continued to be, subject to seizures which he controlled through
medication. IBM was aware of Mr. Carey's health conditions for
more than 20 years prior to his termination. At the time of
signing the release, Mr. Carey had not filed any claims against
IBM in respect of those conditions or otherwise.
Petitioners filed their 1993 Federal income tax return and
did not include the lump-sum payment in their taxable income.
They attached Form 8275 (Disclosure Statement) to their return,
describing the lump-sum payment and claiming it was excludable
pursuant to section 104(a)(2). Petitioners also attached a copy
of the release to their return.
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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
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 at 333-334; Wesson v. United States, 48 F.3d 894, 901-902
(5th Cir. 1995); Bagley v. Commissioner, 105 T.C. 396, 416
(1995), affd. ___ F.3d ___ (8th Cir., Aug. 6, 1997).
Where damages are received pursuant to a settlement
agreement, the nature of the claim that was the actual basis for
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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. Bagley
v. Commissioner, supra; Stocks v. Commissioner, 98 T.C. 1, 11
(1992). If 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.
The first requirement is the existence of a claim "based
upon tort or tort type rights". Commissioner v. Schleier, supra
at 333. The claim must be bona fide, but not necessarily valid,
i.e., sustainable. Taggi v. United States, 35 F.3d 93, 96 (2d
Cir. 1994); Robinson v. Commissioner, 102 T.C. at 126; Stocks v.
Commissioner, supra at 10. Moreover, while it 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.
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As we see it, there are three types of injuries to which the
IBM payments to Mr. Carey might be sourced. First, IBM may have
been motivated to set up the retirement program as a method of
ridding itself of "over-age" employees. However, this source
does not permit exclusion pursuant to section 104(a) under the
Age Discrimination in Employment Act of 1967, Pub. L. 90-202, 81
Stat. 602 (current version at 29 U.S.C. secs. 621-634 (1994)).
Commissioner v. Schleier, supra.
The second motive for payment might have been future claims
for personal injuries, but this source is also precluded from the
exclusion provided by section 104, Roosevelt v. Commissioner, 43
T.C. 77 (1964); Starrels v. Commissioner, 35 T.C. 646 (1961),
affd. 304 F.2d 574 (9th Cir. 1962), as well as the provision of
the release preserving Mr. Carey's right to pursue claims arising
subsequent to the date of the release, see supra p. 4. Nor does
the possibility of emotional distress arising out of pressure on
Mr. Carey to sign the release provide a basis for applying the
section 104(a) exclusion herein in the absence of any specific,
meaningful allegations by petitioners in this regard. Sodoma v.
Commissioner, T.C. Memo. 1996-275.
A third source for the IBM payment might have been Mr.
Carey's prior medical problems and the possible application of
the 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.
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102, 105 Stat. 1072 (current version at 42 U.S.C. sec. 1981a
(1994)). See Phillips v. Commissioner, T.C. Memo. 1997-336, in
which we elaborated on these provisions including the possible
application to emotional distress arising from termination of
employment. We think the record herein is far from adequate to
provide a sufficient basis for denying respondent's motion, but
we need not rest our decision on this ground because,
irrespective of any definitive conclusion on this score,
respondent would still be entitled to have the motion granted.
Gajda v. Commissioner, T.C. Memo. 1997-345; Phillips v.
Commissioner, supra.
Petitioners have the burden of proving the amounts of the
payments allocable to claims of tort or tort type damages for
personal injuries. Failure to meet this burden results in the
entire amount's being presumed not to be excludable. See Taggi
v. United States, supra; Getty v. Commissioner, 91 T.C. 160, 175-
176 (1988), affd. as to this issue and revd. on other issues 913
F.2d 1486 (9th Cir. 1990).
Mr. Carey did not file a claim with IBM prior to the signing
of the release. The release in this case is essentially the same
as that in the many other cases involving IBM separation pay
which have come before this Court. Gajda v. Commissioner, supra;
Lubart v. Commissioner, T.C. Memo. 1997-343; Thorpe v.
Commissioner, T.C. Memo. 1997-342; Phillips v. Commissioner,
supra; Morabito v. Commissioner, T.C. Memo. 1997-315; Sodoma v.
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Commissioner, supra.2 By its terms, Mr. Carey released IBM from
liability for both contract and tort claims, except those claims
arising after the date of signature. The release makes no
allocation of the lump-sum payment. The record herein reflects
no basis for any such allocation.
Finally, as in the other IBM payment cases, the amount of
Mr. Carey's lump-sum payment was calculated on length of service
and salary. The release states that if Mr. Carey 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 Keel v. Commissioner, T.C. Memo. 1997-278, Sodoma
v. Commissioner, supra, and Webb v. Commissioner, T.C. Memo.
1996-50, 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.
We hold that the lump-sum payment is not excludable from
gross income under section 104(a)(2). Accordingly,
Respondent's motion for
summary judgment will be granted
and decision will be entered for
respondent.
2
See also Adams v. Commissioner, T.C. Memo. 1997-357; Keel v.
Commissioner, T.C. Memo. 1997-278.