                             T.C. Memo. 1997-542



                           UNITED STATES TAX COURT



                CHERYL DENESE BREWER, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8612-96.                             Filed December 9, 1997.


     Cheryl Denese Brewer, pro se.

     Jason M. Silver, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION


     JACOBS, Judge:       Respondent determined a $47,047 deficiency in

petitioner's 1992 Federal income tax.

     The   issues   for     decision   are:    (1)     Whether    petitioner   is

entitled   to    exclude     from   gross     income    amounts    received    in

settlement of a class action suit pursuant to section 104(a)(2),
                                          - 2 -


and (2) whether petitioner is entitled to exclude from gross income

amounts paid as legal fees.

       Unless otherwise indicated, all section references are to the

Internal Revenue Code as in effect for the year in issue, and all

Rule       references   are   to    the   Tax     Court    Rules   of   Practice    and

Procedure.

                                   FINDINGS OF FACT

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

stipulation of facts and attached exhibits are incorporated herein

by this reference.

       Cheryl Denese Brewer (petitioner) resided in Los Angeles,

California, at the time she filed her petition.                     At all relevant

times, petitioner was an insurance agent.

       On June 1, 1979, a class action lawsuit, Kraszewski v. State

Farm Gen. Ins. Co., was filed against State Farm General Insurance

Co., State Farm Mutual Automobile Insurance Co., State Farm Life

Insurance Co., and State Farm Fire and Casualty Co. (State Farm) in

the U.S. District Court for the Northern District of California.1

The class representatives alleged that State Farm had engaged in

statewide discrimination in California in the recruiting, hiring,

and    training    of   women      for    sales    agent    trainee     positions   in


       1
          On Sept. 9, 1981, the District Court for the Northern
District of California certified a class in Kraszewski to
maintain the action. See Kraszewski v. State Farm Gen. Ins. Co.,
27 Fair Empl. Prac. Cas. (BNA) 27 (N.D. Cal. 1981).
                                     - 3 -


violation of title VII of the Civil Rights Act of 1964, Pub. L. 88-

352, sec. 701, 78 Stat. 241, 42 U.S.C. sec. 2000e to 2000e-17

(title VII).       The representatives sought backpay, as well as

injunctive and declaratory relief.

     On   November    6,    1981,   the    District    Court    bifurcated     the

litigation into a liability and a remedy phase.            On April 29, 1985,

the court ruled in the liability phase that State Farm was liable

under title VII for classwide discrimination on the basis of

gender.   See Kraszewski v. State Farm Gen. Ins. Co., 38 Fair Empl.

Prac. Cas. (BNA) 197 (N.D. Cal. 1985).               The court concluded that

women who   attempted       to   become    trainee    agents    were   "lied   to,

misinformed, and discouraged in their efforts to attain the entry

level sales position."       Id. at 257.      The court then ruled that the

class action suit properly included "all female applicants and

deterred applicants who, at any time since July 5, 1974, have been,

are, or will be denied recruitment, selection and/or hire as

trainee   agents     by    defendant      companies    within    the   State    of

California." Id. at 258.

     On July 17, 1986, the court held that individual hearings were

appropriate to determine the relief for class members.                 The court

decided that class members were entitled to show that they were

actual victims of discrimination as to any of the vacancies at

State Farm that occurred during the period of liability and were

filled by men.
                                - 4 -


     On June 17, 1979, petitioner sought employment as a State Farm

trainee agent but was not hired.    She subsequently became aware of

the class action suit against State Farm and became a plaintiff in

the suit.    On February 6, 1992, petitioner and State Farm entered

into a "Settlement Agreement and General Release" (settlement

agreement), which provided in relevant part:

                 1. For and in consideration of the sum of
            $186,677.00, and potential additional payments
            of up to $18,000.00 as provided in Paragraph 13
            below, * * * less all required payroll
            deductions applicable to the period of Trainee
            Agency, if any, and inclusive of attorneys's
            [sic] fees and costs to which * * *
            [petitioner] Cheryl Denese Brewer or Claimant's
            Counsel is entitled on a prevailing party basis
            but excluding attorneys' fees and costs as set
            forth in Paragraph 4 below, Cheryl Denese
            Brewer * * * does hereby completely release and
            forever discharge * * * [State Farm] * * * from
            any claim * * * or liability of any and every
            kind based on any federal, state, or local law,
            statute, or regulation, excepting only claims
            for     worker's     compensation     benefits,
            (hereinafter "Claim") which arose prior to the
            execution of this Settlement Agreement and
            General Release, and which was raised, or could
            have been raised in the above-captioned case,
            as well as any and all Claims (including, where
            applicable, claims under the federal Age
            Discrimination in Employment Act) arising out
            of or relating to any alleged discriminatory,
            improper, or unlawful act or omission of State
            Farm in connection with any term or condition
            of employment or independent contractor status
            or the process of securing or attempting to
            secure employee or independent contractor
            status     including,    without    limitation,
            recruitment, selection, hiring, job assignment,
            job    transfer,   training,    promotion,   or
            termination, which arose prior to the execution
            of this Settlement Agreement and General
            Release.
                       - 5 -


    *        *     *     *     *     *     *

     3. * * * [Petitioner] hereby agrees and
promises * * * (3) that by entering into this
Settlement Agreement and General Release, she
is waiving any and all right[s] she may have
under the terms of the Consent Decree
respecting instatement or rights to any other
future class relief * * *

    *        *     *     *     *     *     *

     5. It is understood and agreed that this
is a full and final General Release applying
not only to all Claims which are presently
known, anticipated or disclosed to * * *
[petitioner], but also to all Claims which are
presently    unknown,     unanticipated,    and
undisclosed to * * * [petitioner] and which may
have arisen prior to the date of execution of
this Settlement Agreement and General Release.
* * * [Petitioner] hereby waives any and all
rights or benefits which she may now have, or
may in the future have, under the terms of
Section 1542 of the California Civil Code,
which provides as follows:

             A general release does not
        extend to claims which the creditor
        does not know or suspect to exist in
        his favor at the time of executing
        the release, which if known by him
        must have materially affected his
        settlement with the debtor.

    *        *     *     *     *     *     *

     7. It is understood and agreed that this
compromise settlement includes the compromise
settlement of any and all legal, evidentiary,
discovery, and document production issues
regarding Claim No. 554 * * *.     The parties
further agree and understand that neither State
Farm nor * * * [petitioner] will bring any
motions, either individually or as part of the
class, relative to such Claim No. 554 issues *
* *
                                     - 6 -


                *     *        *       *       *      *      *

                13. * * * The approximate full value of
           * * * [petitioner's] claim under the Consent
           Decree damage formula as of February 1, 1992,
           is $499,912.00, which represents back pay as a
           State Farm agent accrued from the year of the
           challenged appointment to February 1, 1992,
           plus six months of front pay from that date
           forward.

                     b.     Settlement   Cash  at   87.5%
           Acceptance Rate: State Farm offers * * *
           [petitioner] Settlement Cash of $186,677.00,
           which is approximately 37% of the estimated
           full Consent Decree value of her claim, to
           release her claims against State Farm. * * *

                *     *        *       *       *      *      *

                     c.   Incentive Cash for Acceptance
           Rate Above 90%: The Incentive Cash will be
           $1,800.00 per claimant for each full percentage
           point by which the Acceptance Rate * * *
           exceeds 90%. * * *

                *     *        *       *       *      *      *

                     e.   Attorney's Fees: The payments
           State Farm is offering to * * * [petitioner]
           include her attorneys' fees and costs * * *.
           That is, * * * [petitioner] will have to pay
           her attorneys' fees * * * out of the payment
           State Farm makes to her. * * *

In 1992, pursuant to the terms of the settlement, State Farm issued

petitioner and her attorney a check in the amount of $202,877.

Petitioner's attorney retained legal fees of $40,620.

     Petitioner did not report the State Farm payment on her 1992

Federal income tax return.         Respondent determined in the notice of

deficiency that the entire State Farm payment should have been

included   in   petitioner's       gross   income   and   that   petitioner   is
                                    - 7 -


entitled to     claim   legal   fees   in    the   amount    of     $40,620   as   a

miscellaneous itemized deduction.

                                   OPINION

Issue 1.     Excludability of Settlement Proceeds

     The first issue for decision is whether petitioner is entitled

to exclude from gross income, pursuant to section 104(a)(2), amounts

received in settlement of a class action suit.              Petitioner contends

that she is so entitled.        Respondent disagrees.

     Except as otherwise provided, gross income includes income from

all sources.    Sec. 61; Commissioner v. Glenshaw Glass Co., 348 U.S.

426, 429-430 (1955).       Although section 61(a) is to be broadly

construed,    statutory   exclusions        from   income    must    be   narrowly

construed.    Commissioner v. Schleier, 515 U.S. 323, 327-328 (1995).

     Pursuant to 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".        The regulations provide that "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. Thus, in order to exclude damages from gross

income pursuant to section 104(a)(2), the taxpayer must prove that:

(1) The underlying cause of action is based upon tort or tort type
                                - 8 -


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

injuries or sickness.    Commissioner v. Schleier, supra at 336-337.

     Where amounts are received pursuant to a settlement agreement,

the nature of the claim that was the actual basis for settlement

controls whether such amounts are excludable from gross income under

section 104(a)(2).      United States v. Burke, 504 U.S. 229, 237

(1992). The crucial 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). Determining the nature of the

claim is a factual inquiry. Robinson v. Commissioner, 102 T.C. 116,

127 (1994), affd. in part, revd. in part, and remanded 70 F.3d 34

(5th Cir. 1995).

     The amounts petitioner received pursuant to the settlement

agreement were intended to settle her claim under title VII.

Although petitioner did not file an individual complaint in that

case, and the settlement agreement does not contain a specific

reference to title VII, it is clear that title VII is the basis for

the underlying claim. The nature of petitioner's claim is identical

to that stated in the complaint filed by the Kraszewski class

representatives, which alleged that State Farm had engaged in

statewide discrimination in the recruiting, hiring, and training of

women for sales agent trainee positions in violation of title VII.

The plaintiffs sought backpay and injunctive and declaratory relief.

The District Court held that State Farm was liable under title VII
                                - 9 -


to all members of the class who had been discriminated against and

ordered individual hearings.2    Kraszewski v. State Farm Gen. Ins.

Co., 38 Fair Empl. Prac. Cas. (BNA) 197 (N.D. Cal. 1985).        The

court did not limit relief to State Farm employees.

     The U.S. Supreme Court's decision in United States v. Burke,

supra, controls.     The issue in Burke was whether amounts received

in settlement of a title VII claim were excludable pursuant to

section 104(a)(2).    The Court analyzed title VII and held that it

did not provide for remedies to recompense claimants for tort type

personal injuries. Rather, the Court noted that the statute offered

only injunctions, back and front pay, and other equitable relief.

Id. at 238-239.    Accordingly, the Court held that title VII did not

redress a tort type personal injury and consequently that settlement

proceeds based on such a claim are not excludable pursuant to

section 104(a)(2).

     Here, petitioner and State Farm entered into a settlement

agreement pursuant to which State Farm paid $202,877 to petitioner

for her release of a claim "arising out of or relating to any

alleged discriminatory, improper, or unlawful act or omission of

State Farm in connection with * * * recruitment, selection, hiring,

job assignment, job transfer, training, promotion, or termination".

In addition, the settlement agreement specifically stated that it

     2
          Although petitioner did not have a hearing to determine
whether she was entitled to damages, petitioner and State Farm
nevertheless entered into a settlement.
                                       - 10 -


includes    "the    compromise     settlement    of    any   and    all   legal,

evidentiary, discovery, and document production issues regarding

Claim No. 554."3        Thus, the entire award petitioner received in

settlement of her title VII claim against State Farm represented a

compromise and settlement of petitioner's rights pursuant to her

claim against State Farm alleging discrimination under title VII.4

     In    sum,    no   portion   of    petitioner's   settlement    award   was

attributable to a claim based upon tort or tort type rights.               Thus,

we hold that petitioner improperly excluded the settlement proceeds

($202,877) from her 1992 gross income.           Commissioner v. Schleier,

supra at 337; United States v. Burke, supra at 242.                Accordingly,

we sustain respondent's determination.

     We note that our opinion herein is consistent with prior

decisions of this Court, which also held that settlement proceeds

received pursuant to the Kraszewski litigation were not excludable

from gross income pursuant to section 104(a)(2). See Gillette v.

Commissioner, T.C. Memo. 1997-301; Hayes v. Commissioner, T.C. Memo.

1997-213; Hardin v. Commissioner, T.C. Memo. 1997-202; Raney v.

Commissioner, T.C. Memo. 1997-200; Clark v. Commissioner, T.C. Memo.


     3
          Claim No. 554 was the identification of petitioner's
claim against State Farm in the class action suit.
     4
          As petitioner's claim arose in 1979 and the class
action suit was filed in that year, the amendments to title VII
made by sec. 102 of the Civil Rights Act of 1991, Pub. L. 102-
166, 105 Stat. 1072-1074, do not apply. Landgraf v. USI Film
Prods., 511 U.S. 244 (1994).
                                 - 11 -


1997-156; Berst v. Commissioner, T.C. Memo. 1997-137; Martinez v.

Commissioner, T.C. Memo. 1997-126; Fredrickson v. Commissioner, T.C.

Memo. 1997-125.

Issue 2. Excludability of Legal Fees

     The second issue is whether petitioner is entitled to exclude

from gross income amounts paid as legal fees.            Petitioner argues

that because her legal fees were paid to counsel from the settlement

proceeds and petitioner never received such fees, petitioner is

entitled to exclude the legal fees from her 1992 income. Respondent

contends that petitioner may deduct attorney's fees of $40,620 as

a miscellaneous itemized deduction to the extent they exceed 2

percent of petitioner's adjusted gross income.

     Although State Farm issued a check jointly to petitioner and

her attorney, petitioner was responsible for her legal costs.          The

settlement agreement provided, inter alia, that the State Farm

payment included petitioner's attorney's fees and that it was

petitioner's responsibility to pay her attorney's fees.

     Thus, we agree with respondent that the attorney's fees are

includable   in   petitioner's   gross    income   and   deductible   as   a

miscellaneous itemized deduction.        See Alexander v. Commissioner,

72 F.3d 938, 946 (1st Cir. 1995), affg. T.C. Memo. 1995-51.
                             - 12 -


    We have considered all of petitioner's other arguments and

found them to be either irrelevant or without merit.

     To reflect the foregoing,



                                        Decision will be entered

                                   for respondent.
