                         T.C. Memo. 1997-200



                       UNITED STATES TAX COURT



             JOHN P. AND CAROLYN L. RANEY, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4039-95.                    Filed May 1, 1997.


     John P. and Carolyn L. Raney, pro sese.

     Margaret A. Martin, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     WELLS, Judge:    Respondent determined a deficiency of $27,062

in petitioners' 1991 Federal income tax.

     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.
                               - 2 -

     After concessions,1 the issue to be decided is whether

petitioners are entitled to exclude, pursuant to section

104(a)(2), amounts received in settlement of a class action suit.

                         FINDINGS OF FACT

     Some of the facts have been stipulated for trial pursuant to

Rule 91.   The parties' stipulations of fact are incorporated

herein by reference and are found as facts in the instant case.

     At the time they filed their petition in the instant case,

petitioners resided in El Dorado Hills, California.

     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.2   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 violation of title VII of the Civil Rights Act of

1
     In the notice of deficiency, respondent determined that, for
taxable year 1991, petitioners were liable for self-employment
tax in the amount of $5,381 and were entitled to a self-
employment tax deduction in the amount of $2,690. Subsequently,
the parties conceded that petitioners were not liable for the
self-employment tax and that petitioners were not entitled to the
self-employment tax deduction.
2
     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 -

1964, 42 U.S.C. sec. 2000e et seq. (title VII).    The

representatives sought backpay, as well as injunctive and

declaratory relief.

     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 found 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 which occurred during the period of liability and

were filled by men.

     On or around January 25, 1975, petitioner Carolyn L. Raney

(petitioner) applied to become a State Farm trainee agent but was
                               - 4 -

not hired.   On August 1, 1989, petitioner executed a Final Claim

Form in the class action suit, challenging the February 1, 1976,

appointment of Donald B. Buchanan.3        Petitioner subsequently

became a claimant in the class action suit against State Farm.

In November of 1991, 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 $75,000.00,
     less all required payroll deductions applicable to the
     period of Trainee Agency, if any, Carolyn L. Raney * * *
     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 (hereinafter "Claim") which arose
     prior to the execution of this Settlement Agreement and
     General Release, and which were raised, or could have been
     raised in the above-captioned case, as well as any and all
     Claims 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 she may
     have filed or caused to be filed * * * prior to the
     execution of this Settlement Agreement and General Release.

                     *    *    *       *      *    *    *

3
     Before petitioner filed the Final Claim Form, on or around
Jan. 13, 1988, a Consent Decree Regarding Monetary Relief,
Instatement Relief, and Notice (consent decree) was filed in the
class action suit in which the parties to the class action suit,
inter alia, reached an agreement as to the remedy phase of the
litigation. Section A of exhibit 9 to the consent decree
provides, at par. IV.E.2.c., that "Negotiated Settlements are not
governed by the calculation rules for any of the types of damages
available under this [Consent] Decree." Petitioner alleges that
she had never seen the consent decree until she received a copy
from respondent.
                                   - 5 -

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

                       *      *    *       *   *   *    *

          7.   It is understood and agreed that this compromise
     settlement includes the compromise settlement of any and all
     legal, evidentiary, discovery, and production issues
     regarding Claim No. 162. * * * [Petitioner] further agrees
     and understands that * * * [petitioner] will not bring any
     motions, either individually or as part of the class,
     relative to such Claim No. 162 issues.

On November 27, 1991, pursuant to the terms of the settlement,

State Farm issued petitioner and her attorneys a check in the

amount of $75,000 (State Farm payment).

     On their 1991 joint Federal income tax return, petitioners

reported the State Farm payment as gross receipts in the amount

of $75,000 on their Schedule C.        Petitioners, however, also

reported $75,000 as a Schedule C expense, claiming that the

amount was derived from a personal injury claim and, therefore,

was excludable from gross income pursuant to section 104(a)(2).

Respondent determined that the entire State Farm payment should

have been included in petitioners' gross income.

                                  OPINION

     Except as otherwise provided, gross income includes income

from all sources.   Sec. 61; Commissioner v. Glenshaw Glass Co.,

348 U.S. 426 (1955).       Although section 61(a) is to be broadly

construed, statutory exclusions from income must be narrowly
                                - 6 -

construed.   Commissioner v. Schleier, 515 U.S. ___,    , 115 S.

Ct. 2159, 2163 (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.   Accordingly, to exclude

damages from gross income pursuant to section 104(a)(2), the

taxpayer must establish that:   (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.

Commissioner v. Schleier, 515 U.S. at ___, 115 S. Ct. at 2167.

     Turning to the first requirement of Commissioner v.

Schleier, supra, we examine whether petitioner's claim was "based

upon tort or tort type rights".   Citing United States v. Burke,

504 U.S. 229, 237 (1992), respondent argues that petitioner's

claim, which arose under title VII, was not based upon tort or

tort type rights.   Petitioners, however, argue that petitioner's

claim was based upon tort or tort type rights because, as

petitioner was never an employee or trainee of State Farm, the

State Farm payment could therefore only represent tort or tort
                                 - 7 -

type damages.   Alternatively, petitioners argue that petitioner's

claim was based upon tort or tort type rights because there is no

evidence in the settlement agreement that State Farm intended to

award backpay or any other pay.    Additionally, petitioners argue

that, as section A of exhibit 9 to the consent decree recognizes

damages other than title VII damages, petitioner's claim was

based upon tort or tort type rights.

     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 pursuant to section 104(a)(2).     United States v.

Burke, supra at 237.   The critical question is "in lieu of what

were damages awarded" or paid.     Bagley v. Commissioner, 105 T.C.

396, 406 (1995); Bent v. Commissioner, 87 T.C. 236, 244 (1986),

affd. 835 F.2d 67 (3d Cir. 1987).    Determination of 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).

     Petitioners' first argument is that the State Farm payment

could only represent tort or tort type damages because petitioner

was never an employee or trainee of State Farm.    We disagree.

The District Court found State Farm liable with respect to "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
                                 - 8 -

within the State of California."    Significantly, the court did

not limit relief to employees of State Farm.    The court found

State Farm liable under title VII to women who were "denied

recruitment, selection and/or hire as trainee agents".

     Petitioners' alternative argument is that, because there is

no evidence in the settlement agreement that State Farm intended

to award backpay or any other pay, petitioner's claim was based

upon tort or tort type rights.    Although the settlement agreement

does not contain a specific reference to title VII, the

surrounding circumstances convince us that, pursuant to the

settlement agreement, the State Farm payment was made to settle a

claim under title VII.   Petitioner was a claimant in a class

action suit that alleged discrimination under title VII and

sought backpay and injunctive and declaratory relief.    The

District Court ruled that State Farm was liable under title VII

to all members of the class who had been discriminated against

and ordered individual hearings.

     Although petitioner did not have a hearing to determine

whether she was entitled to damages, petitioner and State Farm

entered into a settlement agreement pursuant to which State Farm

paid $75,000 to petitioner for petitioner's 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".    Additionally,
                                - 9 -

the settlement agreement expressly stated that it includes "the

compromise settlement of any and all legal, evidentiary,

discovery, and production issues regarding Claim No. 162."4

Accordingly, we conclude that the settlement agreement

represented a compromise and settlement of petitioner's rights

pursuant to her claim against State Farm alleging discrimination

under title VII.5

       Petitioners finally argue that, because section A of exhibit

9 to the consent decree recognizes damages other than title VII

damages, petitioner's claim was based upon tort or tort type

rights.    We, however, conclude that petitioners have failed to

establish that the State Farm payment was attributable to a claim

based upon tort or tort type rights under laws other than title

VII.    Consequently, petitioners have failed to prove that any

part of the State Farm payment is excludable from gross income.

Accordingly, based upon the record in the instant case, we

conclude that, pursuant to the settlement agreement, the State

Farm payment was intended to settle petitioner's claim against

State Farm under title VII.




4
     Claim No. 162 was the identification of petitioner's claim
against State Farm in the class action suit.
5
     As petitioner's claim arose during 1975 and the class action
suit was filed during 1979, 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).
                              - 10 -

     We have considered all of petitioners' remaining arguments

and find them to be without merit.6

     As we have concluded that petitioner's claim was not based

upon tort or tort type rights, we need not address the second

requirement of Commissioner v. Schleier, supra, regarding the

nature of damages.   Accordingly, we conclude that petitioners are

not entitled to exclude from gross income any part of the State

Farm payment pursuant to section 104(a)(2).7

     To reflect the foregoing,


                                           Decision will be entered

                                      under Rule 155.




6
     Petitioners argue, inter alia, that, pursuant to sec. 3509,
respondent should look to State Farm for the tax liability on the
State Farm payment. Petitioner, however, has never been an
employee or trainee of State Farm. Accordingly, as to
petitioner, State Farm has no duty to withhold taxes pursuant to
sec. 3509.
7
     Our opinion herein is consistent with prior decisions of
this Court, which similarly held that settlement proceeds
received pursuant to the Kraszewski litigation were not
excludable from gross income under sec. 104(a)(2). See Clark v.
Commissioner, T.C. Memo. 1997-156; Martinez v. Commissioner, T.C.
Memo. 1997-126; Fredrickson v. Commissioner, T.C. Memo. 1997-125.
