                                T.C. Memo. 2017-6



                         UNITED STATES TAX COURT



                    ANN MCKINNEY, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 9512-15.                           Filed January 5, 2017.



      Ann McKinney, pro se.

      Sheida Lahabi, Janet F. Appel, and Derek W. Kelley, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      NEGA, Judge: Respondent determined a deficiency in petitioner’s 2011

Federal income tax of $9,843.1 The issue for decision is whether $40,000 of


      1
      Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the year at issue, and all Rule references are to the Tax
                                                                       (continued...)
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[*2] settlement proceeds that petitioner received under a settlement agreement and

release (settlement agreement) with her former employer, the U.S. Department of

the Interior, U.S. Geological Survey (Agency), is excludable from her gross

income under section 104(a)(2).

                               FINDINGS OF FACT

      Some of the facts are stipulated and are so found. The stipulation of facts

and the attached exhibits are incorporated herein by this reference. Petitioner

resided in Massachusetts when the petition was filed.

      Petitioner was an employee of Agency from 1974 until her retirement on

July 3, 2009. On May 20, 2009, petitioner filed a complaint of discrimination

(complaint) with the Equal Employment Opportunity Commission against Agency

alleging discrimination and a hostile work environment on the bases of age and

physical disability. After her retirement, petitioner expanded the bases of her

complaint to include constructive discharge and thereafter filed an appeal of her

claims with the Merit Systems Protection Board (MSPB).

      On April 12, 2011, petitioner and Agency entered into a settlement

agreement pursuant to which she agreed to withdraw her complaint and appeal


      1
      (...continued)
Court Rules of Practice and Procedure.
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[*3] before the MSPB, and Agency agreed to pay her a lump sum of $40,000. The

settlement agreement states that petitioner “agrees to be responsible for the tax

consequences of the lump sum payment”.

      On June 14, 2012, Agency filed with the Internal Revenue Service Form

1099-MISC, Miscellaneous Income, for tax year 2011 reporting the payment of

$40,000 of nonemployee compensation to petitioner. Petitioner timely filed her

2011 Form 1040, U.S. Individual Income Tax Return, and on April 15, 2013, filed

Form 1040X, Amended U.S. Individual Income Tax Return, amending her initial

return for tax year 2011. Petitioner failed to report receipt of the $40,000

lump-sum payment on either filed return.

      On January 7, 2015, respondent sent petitioner a notice of deficiency for tax

year 2011 determining a deficiency of $9,843 because of petitioner’s failure to

report the $40,000 lump-sum payment as income. Petitioner timely filed a petition

for redetermination.

                                     OPINION

      Section 61(a) defines “gross income” as “all income from whatever source

derived”. Exclusions from gross income must be narrowly construed.

Commissioner v. Schleier, 515 U.S. 323, 328 (1995) (citing United States v.

Burke, 504 U.S. 229, 248 (1992) (Souter, J., concurring)). Section 104(a)(2)
                                         -4-

[*4] provides that “gross income does not include * * * the amount of any

damages * * * received * * * on account of personal physical injuries or physical

sickness”.

      For purposes of determining whether damages received pursuant to a

written settlement agreement are excludable under section 104(a)(2), we look to

the nature of the claim settled. Burke, 504 U.S. at 237. The nature of the claim is

determined first by looking to the settlement agreement itself for indicia of its

purpose. Greer v. United States, 207 F.3d 322, 329 (6th Cir. 2000). Where the

settlement agreement lacks express statements of purpose, we then look beyond

the agreement to other evidence indicating the “intent of the payor as to the

purpose in making the payment” such as, but not limited to, the amount paid, the

factual circumstances that led to the settlement agreement, and the allegations in

the payee’s complaint and amended complaint. Id. (quoting Knuckles v.

Commissioner, 349 F.2d 610, 613 (10th Cir. 1965), aff’g T.C. Memo. 1964-33);

Robinson v. Commissioner, 102 T.C. 116, 127 (1994), aff’d in part, rev’d in part,

and remanded on another issue, 70 F.3d 34 (5th Cir. 1995).

      The Commissioner’s determination in a notice of deficiency is presumed

correct, and the taxpayer bears the burden of proving that the determination is

erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). If the
                                          -5-

[*5] taxpayer presents objective and credible evidence of the payor’s intent, the

burden of proof may shift to the Commissioner. Sec. 7491(a)(1).

      The settlement agreement between petitioner and Agency does not provide

any indicia as to whether the $40,000 payment, or any portion thereof, was made

pursuant to a claim of personal physical injuries or physical sickness. Further,

notwithstanding her testimony, petitioner has not satisfied her burden of

introducing objective and credible evidence that the $40,000 payment was made

“in lieu” of damages for personal physical injuries or physical sickness. See

Simpson v. Commissioner, 141 T.C. 331, 339-340 (2013) (quoting Fono v.

Commissioner, 79 T.C. 680, 692 (1982), aff’d without published opinion, 749

F.2d 37 (9th Cir 1984)), aff’d, ___ F. App’x ___, 2016 WL 4207982 (9th Cir.

Aug. 10, 2016).

      We conclude that the damages Agency paid petitioner as part of the

settlement agreement were for the resolution and withdrawal of her constructive

discharge and discrimination claims and not on account of personal physical

injuries or physical sickness. Therefore, the $40,000 payment she received

pursuant to the settlement agreement is includible in her income for 2011 and is

not excludable under section 104(a)(2).
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[*6] To reflect the foregoing,


                                        Decision will be entered

                                 for respondent.
