                         T.C. Memo. 1997-137



                      UNITED STATES TAX COURT



           JOHN LEE BERST & CAROLYN ANN PACE, a.k.a.
                CAROLYN ANN BERST, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5346-95.                       Filed March 17, 1997.



     John Lee Berst and Carolyn Ann Pace, pro sese.

     Margaret A. Martin, for respondent.



                         MEMORANDUM OPINION


     RAUM, Judge:   The Commissioner determined a $40,693

deficiency in petitioners' 1992 Federal income taxes.    The

parties have stipulated with respect to a number of issues no

longer in controversy.   The only remaining issue relates to the

includability in gross income of an incentive payment of $16,200
                                 -2-

made by State Farm Insurance Company to petitioner Carolyn Ann

Berst to encourage her to settle her sex discrimination claim in

a class action suit brought under Title VII of the Civil Rights

Act of 1964, 42 U.S.C. sec. 2000e et seq.      The facts have been

stipulated.   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.

     Petitioners, husband and wife, are John Lee Berst and

Carolyn Ann Pace, a.k.a. Carolyn Ann Berst.     References to

petitioner in the singular will be to petitioner wife.     When the

petition in this case was filed, petitioners resided in Truckee,

California.

     Petitioner was a claimant in the class action litigation

filed on June 1, 1979 in the District Court for the Northern

District of California entitled Kraszewski v. State Farm Gen.

Ins. Co..   On April 29, 1985, the District Court issued Findings

of Fact and Conclusions of Law, and ruled that State Farm was

liable for gender discrimination.      38 Fair Emp. Prac. (BNA) Cas.

197 (N.D. Cal. 1985)   The next year, the District Court issued an

order requiring hearings to determine individual liability and

damages.    Kraszewski v. State Farm Gen. Ins. Co., 41 Fair Empl.

Prac. (BNA) Cas. 1088 (N.D. Cal. 1986)      Following the order, the

litigants reached agreements with respect to all issues

concerning the distribution of monetary relief.     These agreements
                                -3-

are set forth in a "Consent Decree Regarding Monetary Relief,

Instatement Relief, and Notice".

     Among other things, the consent decree made provision for

the claimants to litigate the amount of damages awardable under

the decree.   However, such damages were to be limited to "(1)

back pay, (2) front pay, (3) prejudgment interest, (4)

postjudgment interest, and (5) reasonable attorney fees and

costs."

     The District Court referred the litigation to Judge Eugene

Lynch as mediator.   After September 24, 1991, under Judge Lynch,

State Farm and class action counsel began negotiations to reach a

possible settlement of the claims of individual litigants.     As a

result of the negotiations, a Master Settlement Agreement was

reached on January 17, 1992.   It provided a formula for the

computation of damages that State Farm would offer to each

claimant, who was free to accept or reject such offer.

     On or about January 17, 1992, the District Court provided

petitioner with a document entitled "Communication of State

Farm's Settlement Offer", accompanied by a "Summary of Terms of

State Farm's Settlement Offer", which had been reviewed and

approved by Judge Lynch.   Pursuant to the foregoing settlement

offer, State Farm offered petitioner $139,688 to release her

claims against State Farm.   The offer was conditional upon

acceptance of State Farm's offers by at least 87.5 percent "of

the 821 Final Claimants represented by [class action counsel] to
                                 -4-

whom offers of that type had been made."   The $139,688

represented 37 percent of the full Consent Decree value of Mrs.

Berst's claim.    Also, State Farm's offer provided that

petitioner would automatically share in any "incentive cash".

This was an additional amount computed pursuant to a formula

based upon the number of percentage points by which the

acceptance of State Farm's offers exceeded 90 percent.     The

maximum amount of such incentive payment under the formula was

$18,000.   The offer was required to be accepted by March 20,

1992.

     Petitioner accepted the offer, and State Farm issued a

$155,888 check payable to petitioner and class action counsel.

That check represented the $139,688 amount of the settlement of

petitioner's claim, and the remaining amount of $16,200 accounted

for the incentive payment.

     On their 1992 return, petitioners did not include any of the

$139,688 settlement amount or any of the $16,200 incentive

payment in their gross income.   Petitioners have since conceded

that the settlement amount of $139,688 is taxable, a concession

plainly required by United States v. Burke, 504 U.S. 229 (1992).

The only matter remaining for consideration is whether

petitioners may exclude the $16,200 incentive payment from

income.

     Unless otherwise provided, section 61(a) includes in gross

income "all income from whatever source derived".   Section 102(a)
                                  -5-

excludes from gross income "the value of property acquired by

gift".   Property is considered a gift if given in a spirit of

"'detached and disinterested generosity'".     Commissioner v.

Duberstein, 363 U.S. 278, 285 (1960) (quoting Commissioner v. Lo

Bue, 351 U.S. 243, 246 (1956)).    The intent of the transferor

controls the characterization of the property.     Id. at 285-286.

     Petitioners argue that the incentive payment was a gift.

They rely on the language contained in the Communication of State

Farm's Settlement Offer that states that "you will automatically

share in any Incentive Cash".   Petitioners contend that Mrs.

Berst had no control over what the other claimants would do, and

that she was given the incentive payment with no obligation on

her part.   As stated in petitioners' brief:

     There were no services performed, no conditions placed
     upon it [the incentive payment], and it was not
     bargained for. * * * State Farm would not have
     decided to pay each claimant an extra $16,200 on its
     own.

     State Farm's motive for making the incentive payment was far

from "detached and disinterested generosity".     Its relationship

with petitioner was, at best, adversarial.     State Farm was

attempting to settle its case with petitioner as quickly as

possible.   Contrary to petitioners' contention, State Farm paid

the extra amount because, by inducing settlement of the claims,

it paid only a percentage of the "value" of the claims.     In

petitioner's case alone, the full "value" of her claim was

$374,078.   Her settlement represented 37 percent of that amount,
                                 -6-

$139,688.   Offering up to $18,000 to save potentially hundreds of

thousands of dollars indicates self-interest, not disinterest.

     As for petitioners' contention that no conditions were

placed upon the incentive payment, the full quotation from the

Communication of State Farm's Settlement Offer reads, "In

addition, if you accept this offer you will automatically share

in any Incentive Cash payable as described in Paragraph (2)

below."   (Emphasis added.)   Petitioner was not eligible to

receive the incentive cash unless she signed the Release, which

protected State Farm against future claims.     Her signing of the

Release was the consideration for the incentive payment.     It was

thus a bargained-for exchange.

     Petitioners also contend that since there is no body of case

law that includes incentive payments in income, petitioner's

incentive payment should be excluded.     To the contrary, section

61(a) is construed broadly so that, except for those items

specifically exempted, all income is subject to tax.

Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429-430 (1955).

Since there is no specific exemption under which this payment

could be excluded, it must be included in gross income.

     Petitioners advance other arguments which we find to be

without merit.   Due to concessions by the parties,

                                       Decision will be entered

                                 under Rule 155.
