                          T.C. Memo. 1999-95



                        UNITED STATES TAX COURT



         EDWARD A. AND AUDREY PRIMOZIC, ET AL.,1 Petitioners v.
              COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 26382-96, 4808-97,       Filed March 25, 1999.
                  8042-98.



     Karin R. Dunlap, for petitioners.

     Gregory S. Matson and Wendy L. Wojewodski, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION

     GERBER, Judge:     These consolidated cases involve income tax

deficiencies determined by respondent for petitioners’ 1993

taxable year.     Respondent determined a $36,248 deficiency for


     1
       Cases of the following petitioners are consolidated
herewith: Thomas J. and Edith M. Primozic, docket No. 4808-97;
and Kenneth I. Primozic, docket No. 8042-98.
                              - 2 -


petitioners Edward M. and Audrey Primozic, docket No. 26382-96, a

$23,352 deficiency for petitioners Thomas J. and Edith M.

Primozic, docket No. 4808-97, and a $50,112 deficiency for

petitioner Kenneth I. Primozic, docket No. 8042-98.   These cases

were consolidated for trial, briefing, and opinion pursuant to

Rule 141(a).2

     The sole issue for our consideration is whether payments

petitioners received from their former employer are excludable

from income as damages received on account of personal injury or

sickness under section 104(a)(2).

                        FINDINGS OF FACT3

     At the time their respective petitions were filed,

petitioners Edward A. Primozic (Edward) and Audrey Primozic,

husband and wife, resided in Gaithersburg, Maryland; petitioners

Thomas J. Primozic (Thomas) and Edith M. Primozic, husband and

wife, resided in Downer’s Grove, Illinois; and petitioner Kenneth

I. Primozic (Kenneth) resided in Orland Park, Illinois.   Audrey

and Edith Primozic are petitioners in this case solely because

they joined in filing Federal income tax returns with their




     2
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year under
consideration, and all Rule references are to this Court’s Rules
of Practice and Procedure.
     3
       The stipulation of facts and the attached exhibits are
incorporated herein by this reference.
                                 - 3 -


husbands.   Subsequent references to "petitioners" refer only to

Edward, Thomas, and Kenneth.

     Petitioners were all longtime employees of International

Business Machines Corp. (IBM).    Edward and Kenneth were asked by

IBM executives to establish and run the customer business

development (CBD) department in 1985.    The CBD department was

intended to be an IBM in-house consulting group.    Although Edward

was working for IBM in Bethesda, Maryland, and Kenneth was

working for IBM in the Chicago, Illinois, area, they worked

together on the CBD project.

     Edward and Kenneth wrote a book entitled "Strategic

Choices," which discussed the business management techniques that

they were using in the CBD department.    Thomas, though not a part

of the CBD department, helped Edward and Kenneth in the writing

of "Strategic Choices".    Edward and Kenneth owned the rights to

any royalties from "Strategic Choices".    IBM did not pay

petitioners additional compensation for using the management

techniques discussed in the book, and it did not receive

royalties from the book.

     In the course of their work with the CBD department, Edward

and Kenneth became acquainted with high-level management of the

National Association of Counties (NACO), a national association

representing over 6,500 counties in the United States.    NACO was

requesting bids from consulting firms to work with them on a
                               - 4 -


nationwide reinvention of local government projects for all of

their member counties.   The CBD department of IBM prepared a bid

that stressed the "Strategic Choices" management techniques.     IBM

won the bid for the NACO contract.     NACO announced the NACO-IBM

partnership at its national convention in July 1992.

     On February 15, 1993, IBM announced to its employees that it

planned to reduce the number of employees in IBM U.S. Marketing

and Services Co. because of staffing dynamics and IBM’s need to

become more competitive and efficient.    On or about March 5,

1993, Edward and Kenneth were informed that their jobs as part of

the CBD department had been designated "surplus" (chosen for

permanent layoff).   As a result of this decision, Edward and

Kenneth were unable to work on the NACO contract.    Thomas was not

part of the CBD department, and his employment was unaffected by

the decision to "surplus" the CBD department.

     Beginning around March 24, 1993, Edward and Kenneth

attempted to reverse IBM’s decision to surplus the CBD

department.   Thomas did not participate in the attempt.   Edward

and Kenneth disagreed with the decision to surplus their

department, arguing that it was a poor business decision that

would be detrimental to IBM.   This effort was unsuccessful.

Petitioners have never filed any legal action against IBM.

     As part of IBM’s employment reduction efforts, employees

could request to participate in the IBM U.S. Marketing & Services
                               - 5 -


Co. Transition Plan (MSTP).   The MSTP provided a lump-sum payment

and IBM-funded health benefits that were more generous than the

benefits received under IBM’s regular severance program.    IBM

informed its employees that it would withhold appropriate

Federal, State, and local taxes from MSTP lump-sum payments.

     On June 30, 1993, Edward, Kenneth, and Thomas all agreed to

participate in the MSTP program.   In order to join the MSTP, the

participants were required to sign a general release and covenant

not to sue, releasing IBM from all liabilities that might exist,

in contract, in tort, or any other type of claim, resulting from

the employees' termination.   The payments petitioners received

were all calculated according to the MSTP formula, an amount

equal to 1 week’s pay for every 6 months of IBM service either

fully or partially completed as of the date of separation.

Edward, Kenneth, and Thomas received MSTP payments of $140,010,

$147,171, and $83,352, respectively.    Petitioners established

their own consulting business, Strategic Choices, Ltd., following

their departure from IBM.

     On their 1993 income tax returns petitioners excluded from

income the entire amounts of the MSTP payments received.    In

disclosure statements filed with their returns, petitioners

asserted that the authority to exclude the payments from income

was section 104(a)(2).

                              OPINION
                                - 6 -


     The only issue for our consideration is whether the payments

petitioners received for participating in the MSTP program are

excludable from their income for 1993.   Section 61 includes in

gross income all income from whatever source derived.     However,

section 104(a)(2) provides that the amount of damages received

(whether by suit or agreement) on account of personal injuries or

sickness is not included in gross income.   The damages referred

to are based upon tort or tort type rights.     See sec. 1.104-1(c),

Income Tax Regs.

     Petitioners argue that IBM’s decision to surplus the CBD

department, which prevented Edward and Kenneth from working on

the NACO contract, injured their business reputations.4

Therefore, petitioners conclude that the settlement proceeds were

excludable as damages for personal injuries.5    In order for

petitioners’ section 104(a)(2) claim to prevail, they must show

that IBM made the MSTP payments in order to settle petitioners’

claims for personal injuries.   It is the payor’s intent in making

the payments, rather than whether or not the taxpayer actually

suffered a personal injury, that is determinative for purposes of

section 104(a)(2). See Stocks v. Commissioner, 98 T.C. 1, 10


     4
       To the extent we do not address any of petitioners’ other
arguments, we find them to be without merit.
     5
       Petitioners have failed to explain how Thomas, who was not
even a part of the CBD department, was injured by IBM’s decision
to surplus the department.
                                 - 7 -


(1992); Threlkeld v. Commissioner, 87 T.C. 1294, 1297 (1986),

affd. 848 F.2d 81 (6th Cir. 1988).

     Respondent argues that IBM did not make the payments at

issue to petitioners as part of a settlement agreement on account

of personal injuries.    In addition, respondent argues that

petitioners have not proven what part, if any, of the proceeds

was for personal injuries, and that the settlement was in effect

a severance payment.

     Excludability under section 104(a)(2) is, to some extent,

dependent on the origin of the claim asserted.    See Thompson v.

Commissioner, 89 T.C. 632 (1987), affd. 866 F.2d 709 (4th Cir.

1989); Threlkeld v. Commissioner, supra.    Damage to an

individual’s business reputation can be a personal injury for

purposes of section 104(a)(2).    See Threlkeld v. Commissioner,

supra at 1304-1305.    The determination of the nature of a claim

is factual. See Fabry v. Commissioner 111 T.C. 305 (1998); Stocks

v. Commissioner, supra at 11.

     Where damages are received pursuant to a settlement

agreement, as here, the nature of the claim that was the basis

for settlement controls whether such damages are excludable under

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

(1992).   We have looked to the written terms of settlement

agreements to determine the origin and allocation of settlement

proceeds.   See Metzger v. Commissioner, 88 T.C. 834 (1987), affd.
                                 - 8 -


without published opinion 845 F.2d 1013 (3d Cir. 1988).    The

release in this case is essentially the same as that in Lubart v.

Commissioner, T.C. Memo. 1997-343, affd. 154 F.3d 539 (5th Cir.

1998), and in Sodoma v. Commissioner, T.C. Memo. 1996-275.       By

its terms, petitioners released IBM from liability for both

contract and tort claims.    The release, however, does not

specifically indicate that the lump-sum payments received by

petitioners were paid to settle potential personal injury claims

against IBM.

     Where the settlement agreement lacks specific language

stating what the settlement amount was paid to settle, then the

most important factor is generally the intent of the payor.

Respondent argues that petitioners’ failure to lodge any formal

or legal claim against IBM before and at the time of signing the

release established that there was no bona fide dispute between

petitioners and IBM that could provide the basis for settlement.

     To prevail under section 104(a)(2), taxpayers are not

required to assert a legal claim before the settlement or

release.   However, the absence of any knowledge of the claim by

the employer-payor would negatively affect a taxpayer attempting

to show the requisite intent underlying the payment.    See Lubart

v. Commissioner, supra.     Here, Edward and Kenneth notified IBM

executives of the initiation of their attempt to reverse the

decision to surplus the CBD department.    In the letter to the IBM
                                 - 9 -


executives, petitioners stressed the importance of the CBD

department but did not indicate that their business reputations

had been injured or that they intended to assert a tort type

claim against IBM.    Petitioners have attempted to show that their

business reputations were injured by IBM’s actions.       However,

there is no evidence, other than petitioners’ own testimony,

which is not persuasive, that IBM made the MSTP payments to

settle petitioners’ personal injury claims.

     We also note that the release form appears to be a standard

document used by IBM for all of its employees who participate in

the MSTP program.    Moreover, the fact that the payments were

based on time of service and rate of pay is more indicative of

severance pay rather than a payment for personal injury.       See

Sodoma v. Commissioner, supra.     Severance pay is taxable income.

In sum, we find that the payments received by petitioners are not

excludable from income.

     To reflect the foregoing,

                                         Decisions will be entered

                                 for respondent.
