                           T.C. Memo. 1998-214



                         UNITED STATES TAX COURT


            JOANN THOMPSON, F.K.A. JOANN BATES, Petitioner v.
               COMMISSIONER OF INTERNAL REVENUE, Respondent


        Docket No. 4702-97.                        Filed June 17, 1998.


        Charles N. Woodward, for petitioner.

        Elizabeth Downs, for respondent.


                           MEMORANDUM OPINION


        POWELL, Special Trial Judge:   This case was heard pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.1

        Respondent determined a deficiency in petitioner's 1994

Federal income tax and an addition to tax under section 6651(a)

        1
         Unless otherwise indicated, 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.
                               - 2 -

in the amounts of $4,446 and $126, respectively.    Petitioner

resided in Guthrie, Oklahoma, when she filed her petition in this

case.

     The issue is whether $11,100 petitioner received from United

Design Corp. (United) is excludable from gross income under

section 104(a)(2).2

Background

     The facts may be summarized as follows.    Prior to May 1993,

petitioner worked for the Oklahoma school system.    In May 1993,

she was employed by United and became United's personnel manager

in December of that year.   Petitioner reported to Robert M.

Clinton, vice president of United.     After becoming the personnel

manager conflicts developed between petitioner and other

employees of United.   The controversies centered around

petitioner's veracity concerning certain events at United.     At

Mr. Clinton's suggestion petitioner was referred to The

University of Oklahoma Health Sciences Center for evaluation.

That evaluation found that petitioner did not appear to be

suffering from brain dysfunction or psychopathology.

     However, on June 22, 1994, Mr. Clinton wrote to petitioner

that United had

     determined to release you from your at-will employment,
     effective this same date. The reasons for this decision

     2
         Petitioner concedes that, if the $11,100 is includable
in gross income, she is liable for the addition to tax under sec.
6651(a) for failure to timely file her return.
                              - 3 -

     include your inability to effectively manage the central
     functions of the Personnel Department. In recognition of
     your past service to the Company, we have decided to offer
     you the opportunity to submit a voluntary resignation, in
     exchange for a severance package, consisting of the
     following:

          *      *       *          *    *       *      *

          2. Severance Pay. Severance pay in the total amount of
     $11,100.00. This payment amounts to twelve (12) weeks of
     severance pay.

          *      *       *          *    *       *      *

     In consideration for the severance package described herein,
     the Company asks you to (i) execute a voluntary resignation
     (see attached, and (ii) sign a release and waiver of claims
     (see attached). This offer is non-negotiable.

The release provided, inter alia:

          I * * * in consideration of payments to be made to me
     in the sum of * * * ($11,100.00), in addition to other
     sufficient and valuable consideration, * * * release, waive
     and discharge United Design Corporation * * * of from any
     and all claims, actions, causes of actions, damages, costs,
     expenses and compensation, known or unknown, which I may now
     have * * * incidental to, or in connection with my
     employment and/or any cessation thereof.

          * * * I represent that I have no injuries or claims
     against United Design Corporation other than those being
     expressly released herein, and which claims are expressly
     denied by United Design Corporation, and that I intend to
     release all claims * * * including, but not limited to, the
     Age Discrimination In Employment Act * * *.

The letter of resignation stated that petitioner was resigning

her employment "for reasons purely personal and not connected to

* * * [her] employment or working conditions."   Petitioner

executed both the release and the letter of resignation.    After

her resignation petitioner interviewed with the local school
                                 - 4 -

system and was hired as Superintendent of Schools commencing on

August 1, 1994.

     Mr. Clinton was of the opinion that United had valid reasons

to terminate petitioner's employment.    United had a policy of

paying severance amounts when an employment was terminated that

typically were determined by the weekly salary multiplied by

"some number of weeks."    It also had a practice of obtaining

releases from employees whose employment was terminated.

Initially, United's proposed severance payment was for 6 or 8

weeks.   After discussions with petitioner, her attorney, Guy

Jackson (Mr. Jackson), and United's in-house counsel, the weekly

component of the severance pay was increased to 12 weeks.      In

deciding the amount of severance pay, Mr. Clinton specifically

did not intend to compensate petitioner for any personal injury.

Petitioner did not state to Mr. Clinton any claims she felt she

may have had.   He never heard that there was a claim for personal

injury from "psychological, mental and emotional distress".

     At the outset of her difficulties at United, petitioner had

contacted Mr. Jackson.    Mr. Jackson considered possible tort

claims of unjust dismissal and wrongful discharge and claims

based on negligent infliction of emotional distress.    He also

would have considered an age discrimination claim.    Mr. Jackson

had discussions with United's in-house counsel concerning

petitioner's potential claims.    The release was drafted by

United, and United did not want the tort claims of unjust
                                 - 5 -

discharge, wrongful termination, and emotional distress specified

in the release.

     United, at petitioner's request, did not include the $11,100

on the Form W-2 issued to petitioner for 1994.      Rather, United

issued a Form 1099-MISC for the payment.      On her 1994 Federal

income tax return, petitioner revealed the $11,100, but took the

position that the payment was excluded from gross income under

section 104(a)(2).   Respondent determined that the payment was

not excludable.

                            Discussion

     Section 61(a) defines gross income broadly as "all income

from whatever source derived".    The Supreme Court "has given a

liberal construction to this broad phraseology in recognition of

the intention of Congress to tax all gains except those

specifically exempted."   Commissioner v. Glenshaw Glass Co., 348

U.S. 426, 430 (1955).   Exclusions from income are matters of

legislative grace and are construed narrowly.      Commissioner v.

Schleier, 515 U.S. 323, 328 (1995);      Mostowy v. United States,

966 F.2d 668, 671 (Fed. Cir. 1992).      A taxpayer seeking a

deduction or exclusion "must be able to point to an applicable

statute and show that he comes within its terms."      New Colonial

Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); see also

Commissioner v. Schleier, supra.

     Section 104(a)(2) excludes from gross income "the amount of

any damages received (whether by suit or agreement and whether as
                                - 6 -

lump sums or as periodic payments) on account of personal

injuries or sickness".    "The term 'damages received (whether by

suit or agreement)' 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.    There are two separate

requirements that petitioner must satisfy under section

104(a)(2):    (1) "the underlying cause of action giving rise to

the recovery is 'based upon tort or tort type rights'" and (2)

"the damages were received 'on account of personal injuries or

sickness.'"    Commissioner v. Schleier, supra at 337.

     For purposes here, we are willing to assume that under the

applicable Oklahoma law, petitioner may have had some claim

against United in the nature of a tort or tort type cause of

action.   See Barnes v. Commissioner, T.C. Memo. 1997-25.     The

more difficult question, however, is whether the $11,100 was

received on account of a tort or tort type cause of action.     The

question is for what was the amount paid.     Bagley v.

Commissioner, 105 T.C. 396, 406 (1995), affd. 121 F.3d 393 (8th

Cir. 1997).    We are primarily concerned with United's intent in

making the payment.    Knuckles v. Commissioner, 349 F.2d 610, 613

(10th Cir. 1965), affg. T.C. Memo. 1964-33.    While there was not

a comprehensive settlement agreement, the agreement reflected in

the correspondence between petitioner and United indicated that
                                 - 7 -

United considered that the amount was paid as severance pay.

Petitioner's letter of resignation states that she resigned for

personal reasons that were not connected with her employment.

The only mention of petitioner's claims against United is in the

release which releases United from "any and all claims, actions,

causes of actions, damages, costs, expenses and compensation"

including claims under the Age Discrimination in Employment Act

of 1967 (ADEA), Pub. L. 90-202, 81 Stat. 602.       Included in the

release are claims that do not fall within the ambit of section

104(a)(2).   See, e.g., Commissioner v. Schleier, supra (ADEA);

Knuckles v. Commissioner, supra (compensation).       Furthermore, Mr.

Clinton was unaware of any specific tort claims that may have

been raised against United.    We recognize that any involuntary

employment termination may involve mental anguish that may be

classified as a tort damage.    On the other hand, there is no

indication here that the $11,100 was paid to compensate

petitioner for that type of damage.       Therefore, the $11,100

severance payment is not excludable from gross income under

section 104(a)(2).

     To reflect the foregoing,

                                              Decision will be entered

                                         for respondent.
