                        T.C. Memo. 1997-357



                      UNITED STATES TAX COURT



         RICHARD A. AND JANICE S. ADAMS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent




     Docket No. 17020-96.                     Filed August 4, 1997.




     Richard A. and Janice S. Adams, pro se.

     Bonnie L. Cameron, for respondent.



                        MEMORANDUM OPINION


     DAWSON, Judge:   This case was assigned to Special Trial

Judge Carleton D. Powell pursuant to section 7443A(b)(4) and
                                 - 2 -

Rules 180, 181, and 183.1    The Court agrees with and adopts the

opinion of the Special Trial Judge that is set forth below.

                OPINION OF THE SPECIAL TRIAL JUDGE

     POWELL, Special Trial Judge:        Respondent determined a

deficiency in petitioners' 1993 Federal income tax in the amount

of $9,935 and an accuracy-related penalty under section 6662(a)

in the amount of $1,987.    Petitioners resided in Decatur,

Georgia, at the time they filed their petition.

     The sole issue is whether Richard A. Adams (petitioner) is

entitled to exclude a payment received from his former employer,

IBM, from gross income pursuant to section 104(a)(2).

     The facts may be summarized as follows.       Petitioner was

employed by IBM in 1956.    As part of IBM's publicized downsizing

petitioner was retired on September 30, 1993.       The next day

petitioner was employed by a joint venture between IBM and

Eastman Kodak (Kodak) that became Technology Service Solutions

(TSS).   TSS apparently had been a service section of IBM that was

eliminated from the corporate structure by forming the

partnership with Kodak.     Thus, for example, most, if not all, of

petitioner's co-employees and supervisors came from IBM.       In

addition, it appears that petitioner kept several IBM corporate

credit cards while at TSS.

1
     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.
                               - 3 -

     When petitioner left IBM, he received a lump-sum payment of

$36,105.50 pursuant to the terms of an IBM U.S. Marketing and

Services Company Transition Payment Program (MSTP).   In order to

receive the MSTP petitioner was required to execute a "General

Release and Covenant Not To Sue" (the Release).   Under the

Release, in consideration for the MSTP, petitioner

     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.

Petitioner suffered no injury or sickness at the time that he was

retired.

     Petitioners did not include the $36,105.50 in their taxable

income for 1993.   Petitioners, however, attached a Form 8275,

Disclosure Statement, and a copy of the Release to their joint

Federal income tax return for 1993.    These documents reflect the

facts of the payment.   Upon examination, respondent determined

that the $36,105.50 was includable in gross income.

Discussion
                                 - 4 -

     Section 61(a) defines gross income broadly as "all income

from whatever source derived".    Gross income specifically

includes compensation for services.      Sec. 61(a)(1).   Exclusions

from income are matters of legislative grace and are construed

narrowly.    Commissioner v. Schleier, 515 U.S. 323, 328 (1995);

Mostowy v. United States, 966 F.2d 668, 671 (Fed. Cir. 1992).          A

taxpayer seeking an exclusion from income must be able to point

to an applicable statute and show that he comes within its terms.

     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".   The phrase "damages received" is further

defined as "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.     Thus, to

qualify for the exclusion, the taxpayer must satisfy a two-prong

test.   The taxpayer must show that (1) the 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

sickness."    Commissioner v. Schleier, supra at 337.     If a

settlement is attributable to claims based on tort or tort type

rights as well as other rights, the taxpayer bears the burden of

establishing which portion of the settlement is attributable to

damages received based upon tort or tort type rights.      Similarly,
                                - 5 -

if the settlement may be attributable to damages received for

personal injuries or sickness as well as other damages, the

taxpayer bears the burden of establishing which portion of the

settlement is attributable to damages received for personal

injuries or sickness.    Whitehead v. Commissioner, T.C. Memo.

1980-508; see also Rule 142(a); Welch v. Helvering, 290 U.S. 111,

115 (1933).

     Petitioner's argument resembles a cat trying to scale a

blackboard: he has nothing to set his claws into.    First,

petitioner does not point to any injury or sickness that he has

suffered.   Rather, he contends that, since IBM paid him for the

Release, there must have been some injury and it is for the Court

to discern the injury.   While we may strive to be clairvoyant,

this is, indeed, beyond our powers.     Furthermore, while wrongful

employment termination possibly may result in personal injury,

generally the amount of lost wages received in such cases is not

linked to that personal injury, and, therefore, such an award

will not qualify for the exclusion from gross income provided in

section 104(a)(2).   Commissioner v. Schleier, supra at 330.

Here, there is not even a settlement for or a demonstrated

personal injury or sickness.

     Second, even if we were to assume an injury or sickness,

petitioner has not shown which portion, if any, of the payment

was received in settlement of tort or tort type claims.    The

Release relieves IBM from liability from some claims that are not
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based on tort or tort type rights, including contract claims,

claims under the Age Discrimination in Employment Act of 1967

(ADEA), Pub. L. 90-202, 81 Stat. 602, as amended 29 U.S.C. secs.

621-634 (1988), and claims under title VII of the Civil Rights

Act of 1964, Pub. L. 88-352, 78 Stat. 241, 253, as amended 42

U.S.C. secs. 2000e-1 to -17 (1988).     See, e.g., Commissioner v.

Schleier, supra at 336 (holding that settlements for claims made

under the ADEA are not based on tort or tort type rights for

purposes of section 104(a)(2)); United States v. Burke, 504 U.S.

229, 241 (1992) (holding awards of back wages under title VII do

not redress tort-like personal injury within the meaning of

section 104(a)(2)).   Failure to show the specific amount of the

payment allocable to the claims of tort or tort-type damages for

personal injuries results in the entire amount being presumed not

to be excludable.   See Taggi v. United States, 35 F.3d 93, 96 (2d

Cir. 1994); 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).

     Petitioner also argues that his employment with IBM never

actually ceased.    Even if we assume that this is true, the

argument leads nowhere.    Underlying this argument is petitioner's

view that only "severance pay" is taxable.    But, petitioner must

show that there is some provision in the Internal Revenue Code

that exempts the amount that he received from taxation.    Clearly

section 104(a)(2) does not.    Petitioner does not point to, and we
                                - 7 -

are unaware of, any other section providing such an exemption

under these facts. Regardless of how the amount received from IBM

is characterized, it cannot escape the broad provisions of

section 61.

     Respondent also determined that petitioners are liable for

an accuracy-related penalty under section 6662(a) for a

substantial underpayment of tax.    Section 6662(a) imposes a

penalty in an amount equal to 20 percent of the portion of an

underpayment to which that section applies.    Section 6662(b)(2)

provides that the penalty shall apply to any substantial

underpayment due in tax.2    There is a substantial underpayment

if the amount of the underpayment exceeds the greater of 10

percent of the tax required to be shown on the return or $5,000.

Sec. 6662(d)(1)(A).    If, however, the taxpayer discloses the

relevant facts on the return and there is a reasonable basis for

the position, the penalty does not apply.    Sec.

6662(d)(2)(B)(ii).    Petitioners attached Form 8275, Disclosure

Statement, and a copy of the Release to their return.    Those

documents reflect the facts of the payment.    In deciding whether

there was a reasonable basis for petitioners' position, we bear

in mind that petitioners' return was filed before the Supreme


2
   Respondent's trial memorandum argues that the sec. 6662(a)
penalty was attributable to negligence. The notice of deficiency
refers to an underpayment penalty. Even if we were to consider
the issue of negligence, our conclusion would be the same for the
reasons subsequently stated herein.
                               - 8 -

Court's opinion in Commissioner v. Schleier, supra.     Prior to

that time there was confusion concerning the scope of section

104.   Indeed, even in the wake of Commissioner v. Schleier,

supra, there is continuing litigation concerning releases similar

to that executed here.   See, e.g., Brennan v. Commissioner, T.C.

Memo. 1997-317; Morabito v. Commissioner, T.C. Memo. 1997-315;

Keel v. Commissioner, T.C. Memo. 1997-278; Webb v. Commissioner,

T.C. Memo. 1996-50; Elpi v. United States, Civil No. 3:96CV00315

(D. Conn., June 12, 1997).   While petitioners' position may be

wrong, we cannot say that it was unreasonable considering the

confusion in this area of the law.     Accordingly, we do not

sustain the section 6662(a) penalty.



                                           Decision will be entered

                                     for respondent with respect to

                               the deficiency and for petitioners

                               with respect to the penalty under

                               section 6662(a).
