                          T.C. Memo. 2000-173



                        UNITED STATES TAX COURT



           ARNOLD REISMAN AND ELLEN REISMAN, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18805-97.                         Filed May 25, 2000.



     Arnold Reisman and Ellen Reisman, pro sese.

     Marc A. Shapiro, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION


     RUWE, Judge:     Respondent determined a deficiency of $117,567

in petitioners’ joint 1994 Federal income tax.

         The only issue for decision1 is whether a $350,000 payment


     1
      Petitioners paid $38,533 in legal fees in 1994, which the
parties have stipulated will qualify as a miscellaneous expense
on Schedule A, Itemized Deductions, if this Court holds that the
                                                   (continued...)
                              - 2 -

received by petitioners from Case Western Reserve University in

1994 is excludable from gross income under section 104(a)(2).2

                        FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.    Petitioners resided in

Shaker Heights, Ohio, at the time they filed their petition.

     Mr. Reisman was employed by Case Western Reserve University

(CWRU) as a tenured full professor of operations research in the

Weatherhead School of Management.   Mr. Reisman filed a lawsuit in

the U.S. District Court, Northern District of Ohio (Federal

case), and petitioners filed another lawsuit in the Cuyahoga

County Common Pleas Court (State case).    Both lawsuits were filed

against CWRU and various individuals.    The claim asserted in the

Federal case involved age discrimination.    The claims asserted in

the State case involved age discrimination, invasion of privacy,

defamation, intentional infliction of emotional distress, and

loss of consortium.

     The Federal case was tried before a jury in February 1993,



     1
      (...continued)
$350,000 in dispute is includable in petitioners’ 1994 gross
income.
     2
      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 -

resulting in a verdict in favor of CWRU.   Mr. Reisman appealed

the Federal case to the Court of Appeals for the Sixth Circuit.

While the Federal case was on appeal, attorneys representing

petitioners and CWRU entered into settlement negotiations.    Steve

Goldfarb (Mr. Goldfarb) was one of the attorneys who negotiated

on behalf of CWRU.   CWRU was not interested in any settlement

which would allow Mr. Reisman to remain at the university.

Before a final settlement was reached, Mr. Goldfarb received a

letter dated October 26, 1994, from one of the attorneys who

represented Mr. Reisman.   The letter contained the following

passage:

     As I conveyed to you, Steve [Goldfarb], Dr. Reisman’s
     preference is to structure a settlement in which he
     would remain at the university. You indicated,
     however, that the only settlement offer which Case
     Western Reserve University would consider would be one
     in which Dr. Reisman leaves the university * * *

     On November 16, 1994, while the Federal case was pending in

the Court of Appeals for the Sixth Circuit and the State case was

pending in the Cuyahoga County Common Pleas Court, petitioners,

CWRU, and the various individuals named in the two lawsuits

entered into a Confidential Mutual Release and Settlement

Agreement (settlement agreement).   In the settlement agreement,

the parties agreed that Mr. Reisman had also asserted breach of

contract in both lawsuits.
                               - 4 -

     The settlement agreement provides, in part:

          The Parties acknowledge and agree that the
          settlement of this matter and CWRU’s payment
          [of $350,000] pursuant to * * * this
          Agreement represents the compromise of
          disputed claims and compensation to Arnold
          Reisman for the resignation of his position
          and the relinquishment of his tenure rights
          * * *

The settlement agreement also provides, in part:

          CWRU’s settlement and payment in no manner
          constitutes an admission of any liability to
          Reisman, it being expressly understood that
          CWRU vigorously disputes and denies each and
          every claim asserted against CWRU by Reisman.

     No allocation was made in the settlement agreement among the

various claims settled, nor was a specific amount allocated for

Mr. Reisman’s resignation and relinquishment of his tenure

rights.   CWRU viewed the settlement as a buyout of Mr. Reisman’s

tenured contract.   The university normally buys out a tenured

position at approximately three times the individual’s annual

salary.

     In accordance with the terms of the settlement agreement,

CWRU paid petitioners $350,000 on or before December 22, 1994.

Also in accordance with the terms of the settlement agreement,

Mr. Reisman resigned his tenured faculty appointment from CWRU,

effective December 22, 1994.   At the time of his resignation, Mr.

Reisman was earning between $92,000 and $100,000 per year

exclusive of benefits.
                               - 5 -

     Petitioners did not report the $350,000 received from CWRU

on their 1994 Form 1040, U.S. Individual Income Tax Return.

                              OPINION

     The issue is whether the $350,000 payment received by

petitioners from CWRU in 1994 is excludable from gross income

under section 104(a)(2).3   Petitioners argue that the $350,000

payment from CWRU is from a tort-based suit and represents

nontaxable compensation for personal injuries under section

104(a)(2).

     Gross income includes income from whatever source derived.

See sec. 61(a).   Gross income does not include the amount of any

damages received on account of personal injuries or sickness.

See sec. 104(a)(2).   “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.   In order for

damages to be excludable from gross income under section

104(a)(2), the taxpayer must demonstrate that:   (1) The

underlying cause of action is based upon tort or tort type



     3
      The Small Business Job Protection Act of 1996, Pub. L. 104-
188, sec. 1605(a), 110 Stat. 1838, amended sec. 104(a)(2) to
limit the exclusion, inter alia, to "personal physical injuries
or physical sickness". The amendment does not apply to damages
collected before the date of its enactment and has no bearing
here.
                                - 6 -

rights, and (2) the damages were received on account of personal

injuries or sickness.    See Commissioner v. Schleier, 515 U.S.

323, 337 (1995).

       Where amounts are received pursuant to a settlement

agreement, the nature of the claim that was the actual basis for

settlement and not its validity controls whether such amounts are

excludable from gross income under section 104(a)(2).    See Seay

v. Commissioner, 58 T.C. 32, 37 (1972).    “[T]he 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).

       In the instant case, the settlement agreement does not

allocate the $350,000 lump-sum payment among petitioners’ various

claims, so we will examine the nature of each claim in turn.

First, the Federal lawsuit was brought under the Age

Discrimination in Employment Act of 1967 (ADEA), Pub. L. 90-202,

sec. 2, 81 Stat. 602.    Recovery under ADEA is not based upon tort

or tort type rights.    See Commissioner v. Schleier, supra at 334-

336.    Thus, any portion of Mr. Reisman’s claim allocated to the

Federal claim would be taxable.

       Second, in the State action, petitioners sought compensatory

and punitive damages for a statutory claim of age discrimination

and several common law claims, including invasion of privacy,

defamation, intentional infliction of emotional distress, and
                               - 7 -

loss of consortium.   To the extent CWRU’s payment was in exchange

for Mr. Reisman’s tenure, the settlement proceeds would not be

excludable from gross income under section 104(a)(2).   See

Kurowski v. Commissioner, T.C. Memo. 1989-149, affd. 917 F.2d

1033 (7th Cir. 1990).   To the extent any of CWRU’s payment was

for breach of contract, the settlement proceeds would not be

excludable from gross income under section 104(a)(2).   See

Robinson v. Commissioner, 102 T.C. 116, 126 (1994), affd. in part

and revd. in part on another issue 70 F.3d 34 (5th Cir. 1995).

Finally, to the extent any of CWRU’s payment was for punitive

damages, then the proceeds would not be excludable from gross

income under section 104(a)(2).   See O’Gilvie v. United States,

519 U.S. 79, 90 (1996).

     In short, the nature of most of petitioners’ claims that

were resolved as part of the settlement agreement are nontort

type and would not be excluded from gross income under section

104(a)(2).

     Some of petitioners’ common law claims are tort type claims.

Petitioners argue that, as a result of res judicata, the only

claims outstanding at the time of the settlement were personal

injury tort claims.   We disagree.

     The settlement agreement provides that petitioners are being

compensated for the compromise of disputed claims and for Mr.

Reisman’s resignation and relinquishment of his tenure rights.
                               - 8 -

The settlement agreement clearly provides that the parties

intended the agreement to settle any and all claims, including

claims that were raised or could be raised in the Federal case,

which was on appeal, and the State case.   Joel Makee (Mr. Makee),

chief legal counsel at CWRU and a partner at Kelley, McCann &

Livingstone, testified that a portion of the payment was paid to

settle the Federal case on appeal because appeals are expensive.

The settlement agreement also provides that part of the payment

was paid to resolve a breach of contract claim.

     Respondent argues that since the settlement agreement did

not allocate the lump-sum payment among Mr. Reisman’s various

claims, the entire amount is includable in petitioners’ gross

income.   When a settlement agreement includes both contract and

tort claims, and the claims are not specifically apportioned, the

courts may not be in a position to apportion the settlement

payment among the various possible claims.   See Taggi v. United

States, 35 F.3d 93, 96 (2d Cir. 1994).

     As we stated previously, the settlement agreement referred

to both contract and tort type claims.   The settlement agreement

did not allocate the settlement proceeds among the various

claims.   Generally, when a settlement deals with a number of

claims and does not allocate the proceeds to specific claims, and

there is no evidence that a specific claim was meant to be

singled out, we consider the entire amount taxable.   See Morabito
                                - 9 -

v. Commissioner, T.C. Memo. 1997-315.    Where a settlement

agreement lacks express language stating that the payment was (or

was not) made on account of personal injury, we have previously

stated that the most important fact in determining how section

104(a)(2) is to be applied is “the intent of the payor” in making

the payment.    Metzger v. Commissioner, 88 T.C. 834, 847-848

(1987), affd. 845 F.2d 1013 (3d Cir. 1988).   In the absence of an

express settlement agreement, the payor’s purpose in making the

payment is the most important factor.   See Knuckles v.

Commissioner, 349 F.2d 610 (10th Cir. 1965), affg. T.C. Memo.

1964-33.

     Respondent argues that CWRU did not intend to compensate

petitioners for any purported personal injuries resulting from

tort or tort type claims.

     According to the terms of the settlement agreement, the

parties acknowledged and agreed that CWRU’s payment represented

the compromise of disputed claims and compensation to Mr. Reisman

for resigning his position and relinquishment of his tenure

rights.    Mr. Goldfarb testified that he was one of the attorneys

responsible for negotiating the settlement agreement on behalf of

CWRU and the primary drafter of the agreement.   Mr. Goldfarb

indicated that CWRU attempted to settle with Mr. Reisman for

$300,000 because the university viewed the settlement as a buyout

of Mr. Reisman’s tenured contract, and the university normally
                               - 10 -

buys out a tenured position at approximately three times the

individual’s annual salary.   At the time, Mr. Reisman was earning

approximately $100,000 per year exclusive of benefits.   Mr.

Goldfarb testified that $300,000 was paid for Mr. Reisman’s

resignation of his position and relinquishment of his tenure

rights, and $50,000 was paid to “close the deal” and settle all

litigation.

     Mr. Makee negotiated the final settlement agreement on

behalf of the university along with attorney Mr. Goldfarb.4     Mr.

Makee also testified that the $300,000 offered to buy out Mr.

Reisman’s tenured position was based on three times his salary

and that the additional $50,000 was paid to settle the

litigation.    Mr. Makee testified that the university was looking

at the additional payment from a litigation management point of

view.    According to Mr. Makee, the university had been very

successful in the Federal case but there was a pending appeal in

the Sixth Circuit and “appeals are very expensive.”

Additionally, the university was aware that it would incur

additional legal services and costs in the pending State case.

According to Mr. Makee, CWRU was taking into consideration future

litigation costs when it authorized the increased settlement

agreement amount and that the university did not intend to



     4
      Mr. Goldfarb was also an attorney with Kelley, McCann &
Livingstone when the settlement agreement was drafted.
                                - 11 -

compensate Mr. Reisman for any alleged personal injuries.

     The importance of Mr. Reisman’s leaving the university in

order to settle the dispute was conveyed in a letter written by

one of Mr. Reisman’s attorneys to Mr. Goldfarb, which stated:

     As I conveyed to you, Steve [Goldfarb], Dr. Reisman’s
     preference is to structure a settlement in which he
     would remain at the university. You indicated,
     however, that the only settlement offer which Case
     Western Reserve University would consider would be one
     in which Dr. Reisman leaves the university * * *

     According to testimony provided by Mr. Makee, CWRU would

consider only a settlement with Mr. Reisman’s leaving the

university because he was unhappy with the university and the

university was unhappy with him.    Mr. Makee also indicated that

Mr. Reisman had engaged in what the university considered

disruptive conduct as a faculty member.    Thus, the university was

concerned that if it settled the litigation, and Mr. Reisman

remained at CWRU, there would be no guaranty that he would not

continue that kind of conduct.    Finally, Mr. Makee testified that

if Mr. Reisman refused to resign and continued to teach at CWRU,

then the university’s position was to pay nothing to settle any

of the outstanding claims, except perhaps a nominal sum of about

$5,000 as a nuisance payment.    CRWU’s position was based on the

fact that it had won the Federal age discrimination complaint,

which was Mr. Reisman’s primary lawsuit.   As a result, CRWU was

prepared to defend the Federal case on appeal and the State case

as it was developing.
                              - 12 -

     Petitioners argue that because CWRU did not issue a Form W-

2, Wage and Tax Statement, or a Form 1099 for the amount of the

settlement proceeds, or withhold taxes on the settlement

proceeds, the university must have intended the payment to be

nontaxable.5   We disagree.

     Mr. Makee testified that CWRU did not issue a Form W-2 or

1099 because Mr. Reisman’s counsel refused to discuss allocating

the settlement payment.   Under the circumstances, Mr. Makee felt

that it was inappropriate to issue a Form 1099.   Notwithstanding

the fact that Mr. Reisman’s attorneys would not discuss

allocating the proceeds, CWRU settled when negotiations were ripe

for settlement because according to Mr. Makee, Mr. Reisman’s case

was particularly difficult, but one that Mr. Makee felt should be

resolved.

     Overall, we believe that the settlement agreement was

entered into to settle an employment dispute, not to settle tort

type claims.   The record supports our finding that approximately

$300,000 of the lump-sum payment by CWRU was in exchange for Mr.

Reisman’s resignation of his position and the relinquishment of

his tenure rights.   Regarding the remaining $50,000, petitioners


     5
      Petitioners also argue that a letter written by one of
their attorneys who negotiated the settlement agreement on their
behalf, expressing his belief that the payment was nontaxable, is
evidence of CWRU’s intent. We disagree. The letter written by
one of petitioners’ attorneys stating that he believed the
proceeds were nontaxable is not directly relevant as to what CWRU
intended.
                              - 13 -

have failed to establish which portion, if any, was paid to

settle tort type claims for personal injuries.      Petitioners bear

the burden of proving that a specific portion of the settlement

proceeds was paid to settle tort or tort type claims for personal

injuries and thus excludable under section 104(a)(2).     See Rule

142(a).   We hold that the entire $350,000 must be included in

petitioners’ 1994 gross income.



                                      Decision will be entered

                                  for respondent.
