                         T.C. Memo. 2003-329



                       UNITED STATES TAX COURT



                 EUGENE AMOS, JR., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13391-01.             Filed December 1, 2003.



     Terrance A. Costello, for petitioner.

     Blaine C. Holiday, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     CHIECHI, Judge:    Respondent determined a deficiency of

$61,668 in petitioner’s Federal income tax (tax) for 1997.

     The only issue remaining for decision1 is whether the


     1
      Petitioner concedes the determinations in the notice of
deficiency (notice) issued to petitioner with respect to 1997 to
disallow $6,755 of deductions claimed by petitioner in Schedule
                                                   (continued...)
                                   - 2 -

$200,000 settlement amount (settlement amount at issue) that

petitioner received in 1997 in settlement of a claim is

excludable under section 104(a)(2)2 from petitioner’s gross

income for that year.       We hold that $120,000 is excludable and

that $80,000 is not.

                             FINDINGS OF FACT

       Most of the facts have been stipulated and are so found.

       At the time petitioner filed the petition in this case, he

resided in Minneapolis, Minnesota.

       During 1997, petitioner was employed as a television camera-

man.       In that capacity, on January 15, 1997, petitioner was

operating a handheld camera during a basketball game between the

Minnesota Timberwolves and the Chicago Bulls.       At some point

during that game, Dennis Keith Rodman (Mr. Rodman), who was

playing for the Chicago Bulls, landed on a group of photogra-

phers, including petitioner, and twisted his ankle.       Mr. Rodman

then kicked petitioner.       (We shall refer to the foregoing inci-

dent involving Mr. Rodman and petitioner as the incident.)


       1
      (...continued)
A, Itemized Deductions, and $7,178 of deductions claimed by
petitioner in Schedule C, Profit or Loss From Business. There
are other determinations in the notice that are computational in
that resolution of the issues relating to such determinations
flows automatically from our resolution of the issue addressed
herein.
       2
      All section references are to the Internal Revenue Code in
effect for the year at issue. All Rule references are to the Tax
Court Rules of Practice and Procedure.
                               - 3 -

     On January 15, 1997, shortly after the incident, petitioner

was taken by ambulance for treatment at Hennepin County Medical

Center.   Petitioner informed the medical personnel at that

medical center (Hennepin County medical personnel) that he had

experienced shooting pain to his neck immediately after having

been kicked in the groin, but that such pain was subsiding.    The

Hennepin County medical personnel observed that petitioner was

able to walk, but that he was limping and complained of experi-

encing pain.   The Hennepin County medical personnel did not

observe any other obvious signs of trauma.   Petitioner informed

the Hennepin County medical personnel that he was currently

taking pain medication for a preexisting back condition.   The

Hennepin County medical personnel offered additional pain medica-

tions to petitioner, but he refused those medications.   After a

dispute with the Hennepin County medical personnel concerning an

unrelated medical issue, petitioner left Hennepin County Medical

Center without having been discharged by them.

     While petitioner was seeking treatment at Hennepin County

Medical Center, he contacted Gale Pearson (Ms. Pearson) about

representing him with respect to the incident.   Ms. Pearson was

an attorney who had experience in representing plaintiffs in

personal injury lawsuits.   After subsequent conversations and a

meeting with petitioner, Ms. Pearson agreed to represent him with

respect to the incident.
                               - 4 -

     On January 15, 1997, after the incident and petitioner’s

visit to the Hennepin County Medical Center, petitioner filed a

report (police report) with the Minneapolis Police Department.

In the police report, petitioner claimed that Mr. Rodman had

assaulted him.

     On January 16, 1997, petitioner sought medical treatment at

the Veterans Affairs (VA) Medical Center.   The medical personnel

at that medical center (VA medical personnel) took X-rays of

petitioner’s back.   Petitioner complained to the VA medical

personnel about his groin area, but he did not advise them that

he was experiencing any symptoms related to that complaint.    The

VA medical personnel determined that there was no swelling of,

but they were unable to ascertain whether there was bruising

around, petitioner’s groin area.    The VA medical personnel gave

petitioner some pain medication and told him to continue taking

his other prescribed medications.   The VA medical personnel

prepared a report regarding petitioner’s January 16, 1997 visit

to the VA Medical Center.   That report indicated that, except for

certain disk problems that petitioner had since at least as early

as February 14, 1995, “the vertebrae are intact and the remaining

disk spaces are normal.”

     Very shortly after the incident on a date not disclosed by

the record, Andrew Luger (Mr. Luger), an attorney representing

Mr. Rodman with respect to the incident, contacted Ms. Pearson.
                                - 5 -

Several discussions and a few meetings took place between Ms.

Pearson and Mr. Luger.    Petitioner accompanied Ms. Pearson to one

of the meetings between her and Mr. Luger, at which time Mr.

Luger noticed that petitioner was limping.   Shortly after those

discussions and meetings, petitioner and Mr. Rodman reached a

settlement.

     On January 21, 1997, Mr. Rodman and petitioner executed a

document entitled “CONFIDENTIAL SETTLEMENT AGREEMENT AND RELEASE”

(settlement agreement).   The settlement agreement provided in

pertinent part:

          For and in consideration of TWO HUNDRED THOUSAND
     DOLLARS ($200,000), the mutual waiver of costs, attor-
     neys’ fees and legal expenses, if any, and other good
     and valuable consideration, the receipt and sufficiency
     of which is hereby acknowledged, Eugene Amos [peti-
     tioner], on behalf of himself, his agents, representa-
     tives, attorneys, assignees, heirs, executors and
     administrators, hereby releases and forever discharges
     Dennis Rodman, the Chicago Bulls, the National Basket-
     ball Association and all other persons, firms and
     corporations together with their subsidiaries, divi-
     sions and affiliates, past and present officers, direc-
     tors, employees, insurers, agents, personal representa-
     tives and legal counsel, from any and all claims and
     causes of action of any type, known and unknown, upon
     and by reason of any damage, loss or injury which
     heretofore have been or heretoafter may be sustained by
     Amos arising, or which could have arisen, out of or in
     connection with an incident occurring between Rodman
     and Amos at a game between the Chicago Bulls and the
     Minnesota Timberwolves on January 15, 1997 during which
     Rodman allegedly kicked Amos (“the Incident”), includ-
     ing but not limited to any statements made after the
     Incident or subsequent conduct relating to the Incident
     by Amos, Rodman, the Chicago Bulls, the National Bas-
     ketball Association, or any other person, firm or
     corporation, or any of their subsidiaries, divisions,
     affiliates, officers, directors, employees, insurers,
                         - 6 -

agents, personal representatives and legal counsel.
This Agreement and Release includes, but is not limited
to claims, demands, or actions arising under the common
law and under any state, federal or local statute,
ordinance, regulation or order, including claims known
or unknown at this time, concerning any physical,
mental or emotional injuries that may arise in the
future allegedly resulting from the Incident.

   *       *       *       *       *       *       *

     It is further understood and agreed that the
payment of the sum described herein is not to be con-
strued as an admission of liability and is a compromise
of a disputed claim. It is further understood that
part of the consideration for this Agreement and Re-
lease includes an agreement that Rodman and Amos shall
not at any time from the date of this Agreement and
Release forward disparage or defame each other.

     It is further understood and agreed that, as part
of the consideration for this Agreement and Release,
the terms of this Agreement and Release shall forever
be kept confidential and not released to any news media
personnel or representatives thereof or to any other
person, entity, company, government agency, publication
or judicial authority for any reason whatsoever except
to the extent necessary to report the sum paid to
appropriate taxing authorities or in response to any
subpoena issued by a state or federal governmental
agency or court of competent jurisdiction * * * Any
court reviewing a subpoena concerning this Agreement
and Release should be aware that part of the consider-
ation for the Agreement and Release is the agreement of
Amos and his attorneys not to testify regarding the
existence of the Agreement and Release or any of its
terms.

   *       *       *       *       *       *       *

     It is further understood and agreed that Amos and
his representatives, agents, legal counsel or other
advisers shall not, from the date of this Agreement and
Release, disclose, disseminate, publicize or instigate
or solicit any others to disclose, disseminate or
publicize, any of the allegations or facts relating to
the Incident, including but not limited to any allega-
tions or facts or opinions relating to Amos’ potential
                         - 7 -

claims against Rodman or any allegations, facts or
opinions relating to Rodman’s conduct on the night of
January 15, 1997 or thereafter concerning Amos. In
this regard, Amos agrees not to make any further public
statement relating to Rodman or the Incident or to
grant any interviews relating to Rodman or the Inci-
dent. * * *

     It is further understood and agreed that any
material breach by Amos or his attorney, agent or
representative of the terms of this Agreement and
Release will result in immediate and irreparable damage
to Rodman, and that the extent of such damage would be
difficult, if not impossible, to ascertain. To dis-
courage any breach of the terms of this Agreement and
Release, and to compensate Rodman should any such
breach occur, it is understood and agreed that Amos
shall be liable for liquidated damages in the amount of
TWO HUNDRED THOUSAND and No/100 Dollars ($200,000) in
the event such a material breach occurs. Amos agrees
that this sum constitutes a reasonable calculation of
the damages Rodman would incur due to a material
breach.

     It is further understood and agreed, that, in the
event Rodman or Amos claim a material breach of this
Agreement and Release has occurred, either party may
schedule a confidential hearing before an arbitrator of
the American Arbitration Association for a final,
binding determination as to whether a material breach
has occurred. If, after the hearing, the arbitrator
finds that Amos has committed a material breach, the
arbitrator shall order that Amos pay the sum of
$200,000 in liquidated damages to Rodman. * * *

     Amos further represents, promises and agrees that
no administrative charge or claim or legal action of
any kind has been asserted by him or on his behalf in
any way relating to the Incident with the exception of
a statement given by Amos to the Minneapolis Police
Department. Amos further represents, promises and
agrees that, as part of the consideration for this
Agreement and Release, he has communicated to the
Minneapolis Police Department that he does not wish to
pursue a criminal charge against Rodman, and that he
has communicated that he will not cooperate in any
criminal investigation concerning the Incident. Amos
further represents, promises and agrees that he will
                                - 8 -

     not pursue any criminal action against Rodman concern-
     ing the Incident, that he will not cooperate should any
     such action or investigation ensue, and that he will
     not encourage, incite or solicit others to pursue a
     criminal investigation or charge against Rodman con-
     cerning the Incident.

     Petitioner filed a tax return (return) for his taxable year

1997.    In that return, petitioner excluded from his gross income

the $200,000 that he received from Mr. Rodman under the settle-

ment agreement.

     In the notice that respondent issued to petitioner with

respect to 1997, respondent determined that petitioner is not

entitled to exclude from his gross income the settlement amount

at issue.

                               OPINION

     We must determine whether the settlement amount at issue may

be excluded from petitioner’s gross income for 1997.   Petitioner

bears the burden of proving that the determination in the notice

to include the settlement amount at issue in petitioner’s gross

income is erroneous.3   See Rule 142(a); Welch v. Helvering, 290

U.S. 111, 115 (1933).

     Section 61(a) provides the following sweeping definition of

the term "gross income":   "Except as otherwise provided in this


     3
      Petitioner does not contend that sec. 7491(a) is applicable
in this case. Even if petitioner had advanced such a contention,
he has not established that he has complied with the applicable
requirements of sec. 7491(a)(2). Under the circumstances pre-
sented in this case, we conclude that the burden of proof does
not shift to respondent under sec. 7491(a).
                                 - 9 -

subtitle, gross income means all income from whatever source

derived".   Not only is section 61(a) broad in its scope, Commis-

sioner v. Schleier, 515 U.S. 323, 328 (1995), exclusions from

gross income must be narrowly construed, id.; United States v.

Burke, 504 U.S. 229, 248 (1992).

     Section 104(a)(2) on which petitioner relies provides that

gross income does not include:

           (2) the amount of any damages (other than puni-
      tive damages) received (whether by suit or agreement
      and whether as lump sums or as periodic payments) on
      account of personal physical injuries or physical
      sickness;

     The regulations under section 104(a)(2) restate the statu-

tory language of that section and further provide:

     The term "damages received (whether by suit or agree-
     ment)" means an amount received (other than workmen's
     compensation) 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.]

     The Supreme Court summarized the requirements of section

104(a)(2) as follows:

           In sum, the plain language of § 104(a)(2), the
      text of the applicable regulation, and our decision
      in Burke establish two independent requirements that
      a taxpayer must meet before a recovery may be ex-
      cluded under § 104(a)(2). First, the taxpayer must
      demonstrate that the underlying cause of action giv-
      ing rise to the recovery is "based upon tort or tort
      type rights"; and second, the taxpayer must show that
      the damages were received "on account of personal
      injuries or sickness." * * * [Commissioner v.
      Schleier, supra at 336-337.]

     When the Supreme Court issued its opinion in Commissioner v.
                              - 10 -

Schleier, supra, section 104(a)(2), as in effect for the year at

issue in Schleier, required, inter alia, that, in order to be

excluded from gross income, an amount of damages had to be

received "on account of personal injuries or sickness."   After

the Supreme Court issued its opinion in Schleier, Congress

amended (1996 amendment) section 104(a)(2), effective for amounts

received after August 20, 1996, by adding the requirement that,

in order to be excluded from gross income, any amounts received

must be on account of personal injuries that are physical or

sickness that is physical.4   Small Business Job Protection Act of

1996, Pub. L. 104-188, sec. 1605, 110 Stat. 1755, 1838-1839.    The

1996 amendment does not otherwise change the requirements of

section 104(a)(2) or the analysis set forth in Commissioner v.

Schleier, supra; it imposes an additional requirement for an

amount to qualify for exclusion from gross income under that

section.

     Where damages are received pursuant to a settlement agree-

ment, such as is the case here, the nature of the claim that was

the actual basis for settlement controls whether such damages are


     4
      Sec. 104(a) provides that emotional distress is not to be
treated as a physical injury or physical sickness for purposes of
sec. 104(a)(2), except for damages not in excess of the amount
paid for medical care attributable to emotional distress. In
this connection, the legislative history of the 1996 amendment
states: "It is intended that the term emotional distress in-
cludes symptoms (e.g., insomnia, headaches, stomach disorders)
which may result from such emotional distress." H. Conf. Rept.
104-737, at 301 n.56 (1996), 1996-3 C.B. 741, 1041 n.56.
                               - 11 -

excludable under section 104(a)(2).     United States v. Burke,

supra at 237.   The determination of the nature of the claim is

factual.    Robinson v. Commissioner, 102 T.C. 116, 126 (1994),

affd. in part, revd. in part, and remanded on another issue 70

F.3d 34 (5th Cir. 1995); Seay v. Commissioner, 58 T.C. 32, 37

(1972).    Where there is a settlement agreement, that determina-

tion is usually made by reference to it.     See Knuckles v. Commis-

sioner, 349 F.2d 610, 613 (10th Cir. 1965), affg. T.C. Memo.

1964-33; Robinson v. Commissioner, supra.     If the settlement

agreement lacks express language stating what the amount paid

pursuant to that agreement was to settle, the intent of the payor

is critical to that determination.      Knuckles v. Commissioner,

supra; see also Agar v. Commissioner, 290 F.2d 283, 284 (2d Cir.

1961), affg. per curiam T.C. Memo. 1960-21.      Although the belief

of the payee is relevant to that inquiry, the character of the

settlement payment hinges ultimately on the dominant reason of

the payor in making the payment.     Agar v. Commissioner, supra;

Fono v. Commissioner, 79 T.C. 680, 696 (1982), affd. without

published opinion 749 F.2d 37 (9th Cir. 1984).      Whether the

settlement payment is excludable from gross income under section

104(a)(2) depends on the nature and character of the claim

asserted, and not upon the validity of that claim.     See Bent v.

Commissioner, 87 T.C. 236, 244 (1986), affd. 835 F.2d 67 (3d Cir.

1987); Glynn v. Commissioner, 76 T.C. 116, 119 (1981), affd.
                              - 12 -

without published opinion 676 F.2d 682 (1st Cir. 1982); Seay v.

Commissioner, supra.

     The dispute between the parties in the instant case relates

to how much of the settlement amount at issue Mr. Rodman paid to

petitioner on account of physical injuries.    It is petitioner’s

position that the entire $200,000 settlement amount at issue is

excludable from his gross income under section 104(a)(2).   In

support of that position, petitioner contends that Mr. Rodman

paid him the entire amount on account of the physical injuries

that he claimed he sustained as a result of the incident.

     Respondent counters that, except for a nominal amount (i.e.,

$1), the settlement amount at issue is includable in petitioner’s

gross income.   In support of that position, respondent contends

that petitioner has failed to introduce any evidence regarding,

and that Mr. Rodman was skeptical about, the extent of peti-

tioner’s physical injuries as a result of the incident.    Conse-

quently, according to respondent, the Court should infer that

petitioner’s physical injuries were minimal.   In further support

of respondent’s position to include all but $1 of the settlement

amount at issue in petitioner’s gross income, respondent contends

that, because the amount of any liquidated damages (i.e.,

$200,000) payable by petitioner to Mr. Rodman under the settle-

ment agreement was equal to the settlement amount (i.e.,

$200,000) paid to petitioner under that agreement, Mr. Rodman did
                             - 13 -

not intend to pay the settlement amount at issue in order to

compensate petitioner for his physical injuries.

     On the instant record, we reject respondent’s position.

With respect to respondent’s contentions that petitioner has

failed to introduce evidence regarding, and that Mr. Rodman was

skeptical about, the extent of petitioner’s physical injuries as

a result of the incident, those contentions appear to ignore the

well-established principle under section 104(a)(2) that it is the

nature and character of the claim settled, and not its validity,

that determines whether the settlement payment is excludable from

gross income under section 104(a)(2).   See Bent v. Commissioner,

supra; Glynn v. Commissioner, supra; Seay v. Commissioner, supra.

In any event, we find below that the record establishes that Mr.

Rodman’s dominant reason in paying the settlement amount at issue

was petitioner’s claimed physical injuries as a result of the

incident.

     With respect to respondent’s contention that Mr. Rodman did

not intend to pay the settlement amount at issue in order to

compensate petitioner for his physical injuries because the

amount of liquidated damages (i.e., $200,000) payable by peti-

tioner to Mr. Rodman under the settlement agreement was equal to

the settlement amount (i.e., $200,000) paid to petitioner under

that agreement, we do not find the amount of liquidated damages

payable under the settlement agreement to be determinative of the
                              - 14 -

reason for which Mr. Rodman paid petitioner the settlement amount

at issue.

     On the record before us, we find that Mr. Rodman’s dominant

reason in paying the settlement amount at issue was to compensate

petitioner for his claimed physical injuries relating to the

incident.5   Our finding is supported by the settlement agreement,

a declaration by Mr. Rodman (Mr. Rodman’s declaration),6 and Ms.

Pearson’s testimony.

     The settlement agreement expressly provided that Mr.

Rodman’s payment of the settlement amount at issue

     releases and forever discharges * * * [Mr.] Rodman
     * * * from any and all claims and causes of action of
     any type, known and unknown, upon and by reason of any
     damage, loss or injury * * * sustained by Amos [peti-
     tioner] arising, or which could have arisen, out of or
     in connection with * * * [the incident].

Mr. Rodman stated in Mr. Rodman’s declaration that he entered

into the settlement agreement “to resolve any potential claims”

and that the settlement agreement was intended to resolve peti-

tioner’s “claim without having to expend additional defense

costs.”   The only potential claims of petitioner that are dis-

closed by the record are the potential claims that petitioner had



     5
      As discussed below, Mr. Rodman paid a portion of the set-
tlement amount at issue on account of other secondary reasons.
     6
      The parties introduced into evidence a declaration by Mr.
Rodman, who did not appear as a witness at trial. The parties
stipulated the accuracy and truthfulness of Mr. Rodman’s state-
ments in that declaration.
                              - 15 -

for the physical injuries that he claimed he sustained as a

result of the incident.   Furthermore, Ms. Pearson testified that

Mr. Rodman paid the entire settlement amount at issue to peti-

tioner on account of his physical injuries.     As discussed below,

Ms. Pearson’s testimony that Mr. Rodman paid that entire amount

on account of petitioner’s physical injuries is belied by the

terms of the settlement agreement.     Nonetheless, her testimony

supports our finding that Mr. Rodman’s dominant reason in paying

petitioner the settlement amount at issue was to compensate him

for claimed physical injuries relating to the incident.

     We have found that Mr. Rodman’s dominant reason in paying

petitioner the settlement amount at issue was to compensate him

for his claimed physical injuries relating to the incident.

However, the settlement agreement expressly provided that Mr.

Rodman paid petitioner a portion of the settlement amount at

issue in return for petitioner’s agreement not to:     (1) Defame

Mr. Rodman, (2) disclose the existence or the terms of the

settlement agreement, (3) publicize facts relating to the inci-

dent, or (4) assist in any criminal prosecution against Mr.

Rodman with respect to the incident (collectively, the nonphysi-

cal injury provisions).

     The settlement agreement does not specify the portion of the

settlement amount at issue that Mr. Rodman paid petitioner on

account of his claimed physical injuries and the portion of such
                              - 16 -

amount that Mr. Rodman paid petitioner on account of the nonphys-

ical injury provisions in the settlement agreement.   Nonetheless,

based upon our review of the entire record before us, and bearing

in mind that petitioner has the burden of proving the amount of

the settlement amount at issue that Mr. Rodman paid him on

account of physical injuries, we find that Mr. Rodman paid

petitioner $120,000 of the settlement amount at issue on account

of petitioner’s claimed physical injuries and $80,000 of that

amount on account of the nonphysical injury provisions in the

settlement agreement.   On that record, we further find that for

the year at issue petitioner is entitled under section 104(a)(2)

to exclude from his gross income $120,000 of the settlement

amount at issue and is required under section 61(a) to include in

his gross income $80,000 of that amount.

     We have considered all of the contentions and arguments of

respondent and of petitioner that are not discussed herein, and

we find them to be without merit, irrelevant, and/or moot.

     To reflect the foregoing and the concessions of the parties,


                                    Decision will be entered

                               under Rule 155.
