T.C. Memo. 2000-103
UNITED STATES TAX COURT
FRANCIS G. LAGUAITE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23516-97. Filed March 27, 2000.
Francis G. Laguaite, pro se.
Gwendolyn C. Walker, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
THORNTON, Judge: Respondent determined a deficiency of
$22,906 in petitioner’s 1995 Federal income tax. After
concessions1, the sole issue for our consideration is whether
1
Respondent concedes that petitioner properly included
$22,056 in pension income in his taxable year 1995 Federal income
tax return. In addition, respondent determined that petitioner’s
(continued...)
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$76,740 that petitioner received upon termination from his former
employer is excludable from petitioner’s 1995 gross income
pursuant to section 104(a)(2).2 We hold that it is not.
FINDINGS OF FACT
The parties have stipulated some of the facts, which are
incorporated in our findings by this reference. Petitioner
resided in Stone Mountain, Georgia, when he filed his petition.
On September 20, 1994, petitioner received a phone call from
his employer of 29 years, Air Products and Chemicals, Inc. (APC),
informing him that he was to be terminated. Petitioner was 55
years old at the time.
On or about October 3, 1994, APC sent petitioner an
unexecuted Agreement and General Release form (the release).
The release stated that petitioner would receive a “cash
termination payment equivalent to two weeks’ base pay for each
year and partial year of completed continuous service with the
Company, in consideration of * * * [petitioner’s] execution” of
the release. The release stated that petitioner agrees to
1
(...continued)
dividend income should be increased by $21. Petitioner has not
addressed this issue, and we deem him to have conceded it.
2
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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release and settle “any and all manner of suits, actions, causes
of action, damages and claims, known and unknown” that he has or
may have against APC. The release stated that it
includes, but is not limited to, claims arising under
federal, state and local laws, including those prohibiting
employment discrimination or claims growing out of any legal
restrictions on the Company’s rights to terminate its
employees, including but not limited to the Rehabilitation
Act of 1973 * * *, the Age Discrimination in Employment Act
of 1967, * * * Title VII of the Civil Rights Act of 1964,
* * * the Civil Rights Act of 1991, * * * the Americans with
Disabilities Act, * * * and the Employee Retirement Income
Security Act * * *.
On October 19, 1994, petitioner sent APC a letter demanding
severance pay and asserting that his right thereto was not
conditional on the execution of any release. On October 24,
1994, APC responded by letter stating, “One of the eligibility
criteria for severance pay is the execution of a Release
generally in the form presented to you.” The letter requested
that petitioner notify APC if he wished to suggest modifications
to the release.
By letter dated November 15, 1994, petitioner asserted that
APC’s failure to pay him severance pay would constitute “Common
Law Fraud”. By letter dated December 1, 1994, petitioner
asserted to APC that he was the victim of age discrimination.
APC did not respond to these letters.
After consulting a number of attorneys, on January 6, 1995,
petitioner signed the release and received from APC severance pay
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of $76,739 based on years of service and salary. APC reported
the payment as taxable income to petitioner and withheld Federal
income taxes.
On his 1995 Federal income tax return, petitioner excluded
the severance pay from his taxable income, but disclosed his
position that the payment was not taxable because he believed it
was based upon tort or tort type rights.
OPINION
Except as otherwise provided, gross income includes income
from all sources. See Sec. 61(a); Glenshaw Glass Co. v.
Commissioner, 348 U.S. 426 (1955). Section 104(a)(2) excludes
from gross income “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”. Under
the applicable regulations, “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.” Sec. 1.104-1(c), Income Tax Regs.
For damages to be excludable under section 104(a)(2), a taxpayer
must show: (1) The underlying cause of action giving rise to the
recovery is based upon tort or tort type rights; and (2) the
damages were received on account of personal injuries or
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sickness. See Commissioner v. Schleier, 515 U.S. 323, 336-337
(1995).
Where damages are received pursuant to a settlement
agreement, the nature of the claim that was the actual basis for
settlement governs the excludability of the damages under section
104(a)(2). See United States v. Burke, 504 U.S. 229, 237 (1992).
“The critical question is, in lieu of what was the settlement
amount paid?” Bagley v. Commissioner, 105 T.C. 396, 406 (1995),
affd. 121 F.3d 393 (8th Cir. 1997).
Assuming that petitioner may have had a potential tort type
claim for emotional distress or other injuries resulting from his
involuntary termination of employment, the crucial question is
whether he received the $76,740 payment on account of personal
injuries or sickness.
Where, as here, the settlement agreement does not expressly
state the purpose for which payment was made, the most important
factor is the payor’s intent. See Knuckles v. Commissioner, 349
F.2d 610, 613 (10th Cir. 1965), affg. T.C. Memo. 1964-33.
The evidence does not indicate that APC intended to
compensate petitioner for personal injuries. To the contrary,
the release, as well as correspondence between APC and
petitioner, indicates that both APC and petitioner regarded the
payment in question as severance pay. Neither the mode of
calculating the payment, based on petitioner’s years of service
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and salary, nor the circumstances under which it was offered to
petitioner, before he had made known to APC any claim of personal
injury, suggest that APC intended to make the payment on account
of any personal injury to petitioner. See Phillips v.
Commissioner, T.C. Memo. 1997-336. The release form appears to
be a standardized document, which is in itself indicative that
the payment was not on account of personal injuries. See Gajda
v. Commissioner, T.C. Memo. 1997-345, affd. 158 F.3d 802 (5th
Cir. 1998). Although petitioner was offered the opportunity to
suggest modifications to the release form, he did not do so.
Consequently, we discern no alteration in APC’s intent in making
the payment from the time it set out the payment criteria in the
release form until it made payment to petitioner according to
those criteria.
The release contains no mention of any particular claims by
petitioner against APC, but rather refers comprehensively to
petitioner’s release of “any and all * * * claims, known and
unknown,” including claims “arising under federal, state and
local laws,” specifying by way of example, inter alia, claims
under the Age Discrimination in Employment Act, for which damages
received are not excludable under section 104(a)(2). See
Commissioner v. Schleier, supra.
Because the release allocates no part of the payment to
claims of tort or tort type damages, and in the absence of facts
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upon which petitioner could rely to prove such an allocation, the
entire payment is presumptively includable in gross income. See
Taggi v. United States, 35 F.3d 93, 96 (2d Cir. 1994); Sherman v.
Commissioner, T.C. Memo. 1999-202; Gajda v. Commissioner, supra.
In sum, while we do not question that petitioner’s
involuntary termination of employment may have caused him
anguish, the evidence does not indicate that APC made the payment
in question to compensate him for personal injury. Rather, we
conclude that the payment represented severance pay, which is not
excludable from income. See Phillips v. Commissioner, supra.
To reflect the foregoing and the parties’ concessions,
Decision will be entered
under Rule 155.