                        T.C. Memo. 1999-202



                      UNITED STATES TAX COURT



          RICHARD AND MARGARET SHERMAN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11665-97.                   Filed June 18, 1999.



     Richard Sherman, pro se.

     Margaret Sherman, pro se.

     Jack H. Klinghoffer, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     JACOBS, Judge:   Respondent determined a $70,120 deficiency in

petitioners' 1993 Federal income tax.   The sole issue for decision

is whether the $207,000 Richard Sherman (petitioner) received upon

termination of his employment with International Business Machines
                               - 2 -


Corporation (IBM) is excludable from petitioners' 1993 gross income

pursuant to section 104(a)(2) as damages received on account of

personal injury or sickness.

     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 the attached exhibits are incorporated

herein by this reference.

     Petitioners resided in New Canaan, Connecticut, at the time

they filed their petition.

     Petitioner was born on April 23, 1938. He graduated from Yale

Law School in 1964, and subsequently became a member of the New

York and District of Columbia bars. Margaret Sherman, petitioner's

wife, did not work outside the home.

Employment with IBM

     Petitioner was employed by IBM between December 1, 1965, and

May 28, 1993.   At all relevant times, he was a staff attorney,

assigned to the IBM corporate division.

     The IBM corporate division determined that "permanent resource

reductions" (permanent employee layoffs) were necessary.        This

determination was announced sometime in February 1993.
                                  - 3 -


     Mr. D.A. Evangelista was the general counsel of IBM in March

1993.     He was informed that his organization had to reduce the

number of employees (attorneys as well as administrative staff)

from 135 to 120.    Of the "resource reduction target" of 15, it was

determined that 2 would come from Mr. L.D. Pearson's group, to

which petitioner was assigned.

     Petitioner was "identified as surplus" based on an "appraisal

sequence banding" used to compare the performance of employees

during the period of February 16, 1990, to February 15, 1993.           The

bandings were alphabetically designed: Band A, was composed of the

highest rated employees, through band G, which was composed of the

lowest rated employees.      Of the three attorneys reporting to Mr.

Pearson, one was in band A, another in band C, and the third,

petitioner, was in band E.

     For the period February 16, 1990, to February 15, 1993,

petitioner had only two performance evaluations, one conducted in

April 1990, and the other in June 1991.        Both placed him in band E.

Petitioner objected to both of these evaluations.

     In    July   1989,   petitioner   filed   an   "open   door"   request

(internal grievance), questioning whether Mr. Pearson improperly

failed to promote him.     In February 1990, petitioner filed another

"open door" request, claiming retribution due to his earlier "open

door" request.      In May 1992, petitioner filed an unfair labor
                                 - 4 -


practice charge against IBM with the National Labor Relations Board

(NLRB).   The charge states:

          Since on or about May 4, 1992, the above-named
     employer   [IBM],   by    its   officers,    agents   and
     representatives, informed Richard Sherman that he was
     evaluated and ranked in the 10% lowest ranking category,
     thereby making him susceptible to a potential future
     layoff, because he engaged in concerted activities with
     other employees of said employer for the purpose of
     collective bargaining and other mutual aid and protection
     and in order to discourage employees from engaging in
     such activities.

          On or about May 4, 1992, the above-named employer
     [IBM], by its officers, agents and representatives,
     retaliated against Richard Sherman by ranking him in the
     10% lowest category making him susceptible to a potential
     future layoff, because said employee gave testimony under
     the Act.

     An NLRB representative informed petitioner that the NLRB was

not going to file a charge against IBM.       The NLRB representative

also told petitioner that IBM's outside counsel, Covington &

Burling, stated that petitioner was a "valued employee and that

[petitioner's] continued employment is not threatened."          By letter

dated August 27, 1992, petitioner withdrew his charges against IBM.

     On March 16, 1993, petitioner was notified that he had been

designated as a "surplus employee", and as a result, his employment

with IBM would likely terminate on May 28, 1993.             On March 17,

1993, petitioner wrote a memorandum to Mr. Evangelista requesting

that his surplus designation be withdrawn.             On March 22, 1993,

petitioner   wrote   a   memorandum   to   four   of    IBM's   management

executives, including IBM's chief executive officer and chief
                                    - 5 -


personnel officer, requesting that his surplus designation be

withdrawn.   In a footnote to this memorandum, petitioner referred

to a dispute between IBM and Mr. Murray, an attorney in IBM's legal

department who had been fired.       The footnote stated:

          IBM Legal management chose not to negotiate with Mr.
     Murray, and instead fired him. IBM is now in extensive
     litigation with Mr. Murray. By current estimate, IBM has
     already spent more than $800,000 (internal and external
     costs) on litigation involving Mr. Murray.

On March 24, 1993, petitioner wrote a second memorandum to the same

four IBM management executives, requesting an "open door" with

regard to his surplus employee designation.              In this request,

petitioner stated:

     There is one aspect of the Open Door procedure which is
     troublesome and which I ask you to address.        Legal
     management   has   the  right   to   review  Open   Door
     investigation reports and conclusions prior to their
     submission to the chairman's office for decision.      I
     understand that Legal management has used that power in
     the past to modify some reports and conclusions. In the
     case of this Open Door, that would create a conflict of
     interest. Therefore, I ask that the Legal Department not
     be permitted to review the investigator's findings prior
     to submission to executive and oversight management.

     Sometime   in   the   latter    part   of   March   1993,   petitioner

collapsed while at work, losing consciousness for a brief period of

time.   Petitioner's collapse resulted in injuries (including hand

tremors, weight loss, and severe headaches).        All medical expenses

incurred by petitioner as a result of his injuries were submitted

to IBM and paid under IBM's medical plan.
                                    - 6 -


     On May 6, 1993, petitioner was advised that his "open door"

request had been denied, and despite his objections, his employment

would be terminated on May 28, 1993.             IBM offered petitioner an

opportunity to participate in its Corporate Transition Program

(CTP),    whereby    petitioner   would     be   entitled   to    receive    the

equivalent    of    1-year's   salary--$107,000--on       the    condition    he

execute an appropriate release.

     At this time, petitioner learned that IBM was hiring new,

younger   attorneys     (recent   graduates      or   individuals    about    to

graduate from law school).        Petitioner consulted an attorney who

advised him that he had a viable cause of action against IBM for

age discrimination. Accordingly, petitioner refused to participate

in the CTP.

     Negotiations      between    IBM   representatives     and     petitioner

ensued.      During the course of these negotiations, petitioner

threatened to obtain an injunction against IBM to stop its layoff

program (at that time, IBM was laying off 30,000-40,000 employees).

On May 13, 1993, petitioner and IBM entered an agreement entitled

"Settlement Agreement and Release" (settlement agreement).                   The

settlement agreement states in pertinent part:

                 WHEREAS, Mr. Sherman has made certain
            allegations about the propriety and lawfulness
            of his having been designated as a "surplus
            employee" resulting in claims of physical and
            mental injury and stress;
                    - 7 -


     WHEREAS, IBM and Mr. Sherman understand
and recognize the inherent expense and risk
involved in litigation;

     WHEREAS, IBM and Mr. Sherman wish to
resolve finally, completely and forever all
disputes   including   but   not  limited   to
allegations of physical and mental injury,
unfair   labor    practices,   discrimination,
retaliation, or any other allegations of
unlawful conduct that Mr. Sherman has made or
could have made, whether known or unknown,
concerning anything that has occurred during
his employment with IBM;

*      *       *       *       *       *     *

     NOW, THEREFORE,   it is hereby agreed as
follows:

     1.     IBM agrees to pay Mr. Sherman the
sum of $103,500 fifteen days after he signs
this Agreement and has his signature notarized
and $103,500 on December 31, 1993.         For
withholding purposes, IBM is required to
withhold certain sums pursuant to the tax code
and regulations; but it will do so without
prejudice to Mr. Sherman taking the position
that some or all of these sums are excludable
from his taxable income.

*       *       *       *       *      *     *

     4.    Mr. Sherman will cease being an IBM
employee on May 28, 1993.

*       *       *       *       *      *     *

     6.     Mr. Sherman agrees to release IBM
from all claims, demands, actions, liabilities
or charges (hereinafter "claims") that he may
have against IBM of whatever kind or nature for
or on account of anything that has occurred,
including but not limited to, any claims for
physical and mental injury, and any claims
which are related to his employment with IBM,
such as claims of retaliation, the termination
                                 - 8 -


          of that employment, or eligibility for other
          severance payments or his eligibility or
          participation in the Retirement Bridge Leave of
          Absence or CTP.

          *      *       *        *       *       *       *

                     c.     This Agreement releases, but
          is not limited to, claims for physical and
          mental injury, claims arising under the Age
          Discrimination in Employment Act of 1967, as
          amended, the National Labor Relations Act of
          1935, as amended ("NLRA"), Title VII of the
          Civil Rights Act of 1964, as amended, the
          Employee Retirement Income Security Act of
          1974, as amended or any other federal, state,
          or   local    law pertaining   to   employment,
          including but not limited to, discrimination or
          retaliation in employment based on sex, race,
          national origin, religion, disability, veteran
          status, age and the filing of an unfair labor
          practice charge with or supplying an affidavit
          to the National Labor Relations Board. This
          Agreement also releases any and all claims
          based on theories of contract or tort, whether
          grounded in common law or otherwise.

                     d.     This Agreement releases all
          claims including those that Mr. Sherman knows
          about and those that he may not know about
          which have accrued at the time he executed this
          Agreement.

          *          *       *        *       *       *   *

          18.      Nothing in this Agreement shall be
          construed as or constitute an admission with
          respect to the validity of any claims or
          allegations which Mr. Sherman has made or could
          have made concerning his employment with IBM or
          with respect to any other matter.

The settlement agreement did not apportion the $207,000 payment

among the various potential claims.
                                          - 9 -


     In 1993, IBM paid petitioner the $207,000, in two payments of

$103,500.    IBM included the $207,000 in petitioner's Form W-2, and

applied withholding tax to the entire amount.

1993 Federal Income Tax Return

     On their 1993 Federal income tax return, petitioners excluded

the $207,000 payment from their income.                      Appended to their return

was a document entitled "Exclusion of Settlement of Personal Injury

Claim (Age Discrimination) from Gross Income".                       In relevant part,

the document stated:

            In exchange for a payment of $207,000 I agreed
            in paragraph number 6(c) to release all claims
            for   age  discrimination,   including   those
            available under Title VII of the Civil Rights
            Act, as amended. I was 55 years old at the
            time IBM was hiring new lawyers (either recent
            graduates or persons about to graduate from
            law school).

            *        *           *         *        *            *        *

                 Therefore I have excluded the $207,000
            settlement for age discrimination from gross
            income.

Notice of Deficiency

     In the notice of deficiency, respondent determined that the

entire $207,000 settlement payment petitioner received from IBM is

includable in petitioners' 1993 gross income.

                                         OPINION

     The     sole   issue    for         decision       is    whether   the    $207,000

petitioner      received    as       a   result    of    the     termination    of   his
                               - 10 -


employment with IBM is excludable from petitioners' 1993 gross

income pursuant to section 104(a)(2).

     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:   (1) The underlying cause of action is based upon tort or

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

personal injuries or sickness.    See Commissioner v. Schleier, 515

U.S. 323, 336-337 (1995).    The claim must be bona fide.   See Taggi

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

     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). See 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
                                - 11 -


of the claim is a factual inquiry.       See Robinson v. Commissioner,

102 T.C. 116, 127 (1994), affd. in part, revd. in part on another

ground and remanded 70 F.3d 34 (5th Cir. 1995).

     In the statement appended to their 1993 return, petitioners

state that the $207,000 payment from IBM was in exchange for

petitioner's "release [of] all claims for age discrimination,

including those available pursuant to title VII of the Civil Rights

Act."     Subsequent to the filing of petitioner's 1993 return, the

Supreme Court in Commissioner v. Schleier, supra, in resolving a

conflict among the circuits, held that back pay and liquidated

damages     recovered   for   age   discrimination   under   the   Age

Discrimination in Employment Act of 1967, Pub. L. 90-202, 81 Stat.

602, currently codified at 29 U.S.C. secs. 621-634 (1994), are not

excludable from gross income under section 104(a)(2) because (1)

the statute does not sound in tort, and (2) no part of the recovery

is received on account of personal injuries or sickness.      (We note

that several years prior to rendering its opinion in Schleier, the

Supreme Court in United States v. Burke, supra, held that back pay

awarded in settlement of title VII claims is not excludable from

gross income under section 104(a)(2).)

        In their petition that was filed after the Supreme Court

rendered its opinion in Schleier, petitioners assert that the

$207,000 payment was solely in settlement of petitioner's claim for

physical and mental injury. They claim that petitioner had a cause
                                         - 12 -


of action against IBM for age discrimination which could be brought

either      in   contract    or   tort    and     that   petitioner   intended   to

institute such a lawsuit in tort.

       The language of paragraph 6 of the settlement agreement is

clear. In exchange for $207,000, Mr. Sherman agreed to release IBM

from all claims and actions, whether based in contract or in tort.

Specifically, petitioner agreed to release IBM from all claims

arising from "any * * * law pertaining to employment, including but

not limited to, discrimination or retaliation in employment based

on   sex,    race,   national     origin,       religion,    disability,    veteran

status, age and the filing of an unfair labor practice charge" as

well as any claims based "on theories of contract or tort". (We

note that the mere listing of a specific cause of action in the

settlement       agreement    does   not    prove    that    petitioner    actually

possessed such a claim against IBM.                      In fact, the settlement

agreement states: "Nothing in this agreement shall be construed as

or constitute an admission with respect to the validity of any

claims or allegations which Mr. Sherman has made or could have made

concerning his employment with IBM or with respect to any other

matter.") Moreover, there is no allocation of the $207,000 payment

to or among any claim or claims petitioner may have had against

IBM.

       The settlement agreement neither mentions any specific injury

sustained by petitioner nor states that the amount petitioner is to
                                   - 13 -


receive thereunder is for a personal injury claim petitioner has

against IBM.     The references to physical and mental injury in the

settlement     agreement    were   inserted    pursuant   to   petitioner's

request.   Indeed, the cover letter from IBM's corporate counsel to

petitioner (with which was enclosed a draft of the settlement

agreement) states:

      The draft attempts to accommodate your request that we
      make it clear that you have asserted claims for personal
      injuries and that the lump sum payments is in settlement
      of those as well as all other claims.

      According to petitioner, he collapsed and suffered injuries

(hand tremors, weight loss, and severe headaches) due to the stress

he   experienced   as   a   consequence   of   IBM's   termination   of   his

employment.     At trial, we observed that petitioner experienced

tremors in his hands.         Although at times, wrongful employment

termination possibly may result in personal injury, if the amount

of lost wages or other compensation received in such cases is not

linked to that personal injury, such an award will not qualify for

the exclusion from gross income provided in section 104(a)(2). See

Commissioner v. Schleier, supra at 330.          Such is the case herein.

       Where a 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. See Knuckles v.

Commissioner, 349 F.2d 610, 612-613 (10th Cir. 1965), affg. T.C.

Memo. 1964-33.     The best indicator of IBM's intent is the language
                                     - 14 -


of   the   settlement    agreement.    The    agreement's    broad    language

indicates that IBM considered the $207,000 payment as a quid pro

quo for petitioner's release of all potential claims against IBM,

including, but not limited to, tort claims.           IBM did not make an

identifiable portion of the payment in settlement of petitioner's

personal injury claim.        The payment was for severance pay as well

as for petitioner's release of potential tort and nontort claims

against IBM.

      It is apparent to us that IBM viewed petitioner as litigious.

Petitioner formally disputed management's decision to end his

employment. He threatened to obtain an injunction to stop IBM's

downsizing    program.   He    had   previously   filed     an    unfair   labor

practice charge against IBM with the NRLB.                And he had filed

several formal complaints against his supervisors.               It was against

this background that IBM negotiated a termination settlement with

petitioner.

      The final settlement amount--$207,000, represented an amount

equal to petitioner's 1-year salary ($107,000), plus $100,000.

Petitioner testified that he wanted a settlement equal to three

times his annual salary (or $321,000).

      We conclude that IBM did not intend for any portion of the

$207,000 to be specifically carved out as a settlement of a tort or

tort type claim on account of a personal injury or sickness.
                                         - 15 -


       The United States Court of Appeals for the Second Circuit,

where an appeal in this case would lie, held in Taggi v. United

States, 35 F.3d at 96, that failure to show the amount of a payment

allocable to claims of tort or tort type damages for personal

injuries results in the entire amount being presumed not to be

excludable. See Pipitone v. United States, ___ F.3d ___ (7th Cir.,

June 14, 1999); see also 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); Morabito v. Commissioner, T.C. Memo.

1997-315.       As    in    Taggi,      the   release   in   this   case   is   all-

encompassing and includes different potential tort and nontort

claims.   As stated, no part of the payment was allocated to any one

cause of action.       And, petitioner has not proven which portion, if

any, of the $207,000 was received in settlement of tort or tort

type   claims    of    personal      injury.       Thus,     assuming   petitioner

sustained a personal injury as a consequence of IBM's termination

of his employment, the record reflects no basis for an allocation,

and, we are not in a position to apportion the payment among the

various   possible         tort   and    nontort   claims     enumerated   in   the

settlement agreement. See, e.g., Adams v. Commissioner, T.C. Memo.

1997-357; Morabito v. Commissioner, supra.

       We have considered all of petitioners' other arguments and, to

the extent not discussed above, find them to be without merit.
                                    - 16 -


     In   sum,   we   hold   that    the     $207,000   settlement   payment

petitioner received from IBM is not excludable from petitioners'

1993 gross income under section 104(a)(2).

     To reflect the foregoing,



                                                  Decision will be entered

                                              for respondent.
