                        T.C. Memo. 1997-317



                      UNITED STATES TAX COURT



                MICHAEL M. BRENNAN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10985-96.                 Filed July 9, 1997.




     Michael M. Brennan, pro se.

     Elizabeth A. Owen, for respondent.



                        MEMORANDUM OPINION


     PARR, Judge:   This case is before us on respondent's motion

for summary judgment under Rule 121.1   Respondent determined a

1
     All section references are to the Internal Revenue Code in
effect for the taxable year in issue, and all Rule references are
to the Tax Court Rules of Practice and Procedure, unless
otherwise indicated. All dollar amounts are rounded to the
                                                   (continued...)
                               - 2 -


deficiency in petitioner's Federal income tax in the amount of

$15,316 for the taxable year 1992.

     The issue for decision is whether petitioner may exclude

from gross income under section 104(a)(2), amounts received from

his employer upon termination of his employment on the ground

that such amounts represented damages received on account of

personal injury.   At the time the petition in this case was

filed, petitioner resided in Austin, Texas.

     A motion for summary judgment is appropriate "if the

pleadings, answers to interrogatories, depositions, admissions,

and any other acceptable materials, together with the affidavits,

if any, show that there is no genuine issue as to any material

fact and that a decision may be rendered as a matter of law."

Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520

(1992), affd. 17 F.3d 965 (7th Cir. 1994).    The moving party

bears the burden of proving that there is no genuine issue of

material fact, and factual inferences are viewed in the light

most favorable to the nonmoving party.    United States v. Diebold,

Inc., 369 U.S. 654, 655 (1962); Preece v. Commissioner, 95 T.C.

594, 597 (1990).   The opposing party cannot rest upon mere

allegations or denials, but must set forth specific facts showing

there is a genuine issue for trial.    Rule 121(d).   The existence


1
 (...continued)
nearest dollar, unless otherwise indicated.
                               - 3 -


of any reasonable doubt as to the facts will result in denial of

the motion for summary judgment.   Hoeme v. Commissioner, 63 T.C.

18, 20 (1974).

     The facts presented below are stated solely for purposes of

deciding respondent's motion for summary judgment.

Background

     Petitioner was employed by International Business Machines

Corporation (IBM) until his termination on April 20, 1992.

Petitioner was employed to develop, manage, and present trade

shows.

     At some point prior to July 31, 1992, petitioner became

eligible to participate in the IBM Modified and Extended

Individual Transition Option Program (ITO II Program).   The ITO

II Program allows IBM employees to resign or retire early,

receiving lump-sum payments and other benefits.   Petitioner was

required to sign a General Release and Covenant Not to Sue (the

release) as a condition for receiving the lump-sum payment and

benefits pursuant to the ITO-II program.   The release is broadly

written and covers any and all possible and potential claims in

contract or in tort arising from employment or termination of

employment.   Pertinent sections of the release read as follows:

          In exchange for the sums and benefits which you
     will receive pursuant to the terms of the * * * [ITO-II
                              - 4 -


     Program], M. M. Brennan[2] (hereinafter "you") agrees
     to release * * * [IBM] from all claims, demands,
     actions or liabilities you may have against IBM of
     whatever kind, including but not limited to those which
     are related to your employment with IBM or the
     termination of that employment. * * * You also agree
     that this release covers, but is not limited to, claims
     arising from the Age Discrimination in Employment Act
     of 1967, as amended, Title VII of the Civil Rights Act
     of 1964, as amended, and any other federal or state law
     dealing with discrimination in employment on the basis
     of sex, race, national origin, religion, disability, or
     age. You also agree that this release includes claims
     based on theories of contract or tort, whether based on
     common law or otherwise. This release does not include
     your vested rights, if any, in the IBM Retirement Plan,
     which survive unaffected by this release.

               *    *    *    *       *   *   *

     3.   This release does not waive any claims that you
          may have which arise after the date you sign this
          release.

               *    *    *    *       *   *   *

     6.   In the event of rehire by IBM or any of its
          subsidiaries as a regular employee, you understand
          that IBM reserves the right to require repayment
          of a prorated portion of the ITO-II Program
          payment. The amount of repayment will be based on
          the number of weeks off the IBM payroll compared
          with the number of weeks' salary used to calculate
          your payment.

     On July 31, 1992, petitioner signed the release.   At the

time of signing the release petitioner had no legal claims

pending in either State or Federal court against IBM for unlawful




2
     The name M. M. Brennan was typewritten in a blank space
provided in the release.
                                - 5 -


employment practices.3   Petitioner, however, thought that he had

a claim against IBM for infliction of emotional distress caused

by his hectic employment travel schedule and pressure at work.4

     In exchange for signing the release and participating in the

ITO II Program, petitioner received a $52,169 lump-sum payment

(the payment or ITO payment).   The payment was based on years of

service and rate of pay.   At the time of signing the release,

petitioner attached a statement to it indicating that he was

submitting the release under duress.

     For the year 1992 petitioner received a Form W-2 from IBM

showing wages, tips, and other compensation as $90,946.51.   On

October 13, 1993, petitioner filed his 1992 Federal income tax

return.   Petitioner reported the $90,946.51 as wages, subtracted

the $52,169 ITO payment therefrom, and attached a disclosure

3
     Although petitioner did not file any legal claims against
IBM prior to signing the release, he did file informal claims
against IBM pursuant to the company's own internal Open Door
program.
4
     During the 179-day period from Oct. of 1991, through Mar. of
1992, petitioner was traveling or away from home on business for
119 days. On Mar. 28, 1992, petitioner suffered a nervous
breakdown at his hotel room in Cincinnati, Ohio, and had to enter
an emergency room for treatment. Upon petitioner's release, IBM
requested that he return to Austin immediately. From Apr. 2
through Apr. 4, 1992, at IBM's request, petitioner underwent a
complete neurological checkup. Upon returning to work in late
April, petitioner felt that nothing had changed; he was still
expected to travel at the same frenetic pace. Following a
difficult and pressured meeting with his supervisor, petitioner
submitted a request for participation in the ITO II Program.
Petitioner, in fear of experiencing another nervous breakdown,
signed the release on July 31, 1992.
                               - 6 -


statement to his return, asserting that the ITO payment is

excludable from gross income pursuant to section 104(a)(2) as a

payment received in exchange for the release and settlement of

tort-type rights.   Respondent determined that the ITO payment was

fully taxable severance pay.

Discussion

     Except as otherwise provided, gross income includes income

from all sources.   Sec. 61(a); Commissioner v. Glenshaw Glass

Co., 348 U.S. 426 (1955).   While section 61(a) is to be broadly

construed, statutory exclusions from income are narrowly

construed.   Commissioner v. Schleier, 515 U.S. 323,   327-328

(1995); Kovacs v. Commissioner, 100 T.C. 124, 128 (1993), affd.

without published opinion 25 F.3d 1048 (6th Cir. 1994).

     Under section 104(a)(2), gross income does not include "the

amount of any damages received (whether by suit or agreement and

whether as lump sums or as periodic payments) on account of

personal injuries or sickness".   Section 1.104-1(c), Income Tax

Regs., provides:

          (c) Damages received on account of personal
     injuries or sickness. * * * The term "damages
     received (whether by suit or agreement)" means an
     amount received * * * 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.

     Thus, an amount may be excluded from gross income only when

it was received both: (1) Through prosecution or settlement of an
                                 - 7 -


action based upon tort or tort type rights; and (2) on account of

personal injuries or sickness.     Commissioner v. Schleier, supra;

Wesson v. United States, 48 F.3d 894, 901-902 (5th Cir. 1995);

Bagley v. Commissioner, 105 T.C. 396, 416 (1995).

     Where damages are received pursuant to a settlement

agreement, the nature of the claim that was the actual basis for

settlement controls whether such damages are excludable under

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

(1992); Thompson v. Commissioner, 866 F.2d 709, 711 (4th Cir.

1989), affg. 89 T.C. 632 (1987); Robinson v. Commissioner, 102

T.C. 116, 126 (1994), affd. in part, revd. in part 70 F.3d 34

(5th Cir. 1995).   "[T]he critical question is, in lieu of what

was the settlement amount paid?"     Bagley v. Commissioner, supra

at 406.

     Determination of the nature of the claim is factual.     Bagley

v. Commissioner, supra; Stocks v. Commissioner, 98 T.C. 1, 11

(1992).   The first requirement is the existence of a claim based

upon tort or tort type rights.     Commissioner v. Schleier, supra

at 337.   The claim must be bona fide, but not necessarily "valid;

i.e.," sustainable.   Taggi v. United States, 35 F.3d 93, 96 (2d

Cir. 1994); Robinson v. Commissioner, 102 T.C. at 126; Stocks v.

Commissioner, supra at 10.   In this connection, we have held that

claims for potential future personal injuries do not qualify for

exclusion under section 104(a).     Roosevelt v. Commissioner, 43
                                 - 8 -


T.C. 77 (1964); Starrels v. Commissioner, 35 T.C. 646 (1961),

affd. 304 F.2d 574 (9th Cir. 1962).      Such holdings imply that

there must be an existing claim.    Moreover, while it need not

have been previously asserted, the absence of any knowledge of

the claim on the part of the employer-payor obviously has a

negative impact in determining the requisite intent of the

payment.   Sodoma v. Commissioner, T.C. Memo. 1996-275; see also

Keel v. Commissioner, T.C. Memo. 1997-278; Foster v.

Commissioner, T.C. Memo. 1996-26.

     Petitioner asserts that he had a bona fide claim against IBM

for infliction of emotional distress caused by his travel

schedule and pressures at work, and therefore IBM accepted

petitioner's ITO II Program participation request and subsequent

release in lieu of litigation.    Petitioner claims that his

position is supported by the fact that he filed informal claims

and/or grievances against IBM pursuant to the company's own

internal programs (e.g., Open Door Policy).      Respondent argues

that petitioner's failure to lodge any formal tort-type claim

against IBM prior to and at the time of signing the release

establishes that there was no bona fide dispute between

petitioner and IBM that could provide the basis for settlement.

      We disagree.   An employee is not always required to file a

formal legal action against an employer prior to settling an

existing claim in order to exclude such settlement payment from
                                 - 9 -


income under section 104(a)(2).     Sodoma v. Commissioner, supra.

Viewing the facts in the light most favorable to petitioner, it

can be argued that petitioner's filing of complaints with IBM's

grievance committee is at least some evidence of an existing

dispute between the parties that could have provided the basis

for settlement.   Thus, we find, for purposes of this motion only,

that petitioner has met the first prong of excludability under

section 104(a)(2) in that he has established the existence of an

underlying tort-type cause of action.    See Commissioner v.

Schleier, supra; also see     Taggi v. United States, supra at 96 (a

claim must be bona fide, but does not necessarily have to be

sustainable or valid).

     We now turn to the language of the release itself.    The

release in this case is the same as that in Webb v. Commissioner,

T.C. Memo. 1996-50, and essentially the same as that in Sodoma v.

Commissioner, supra.     By its terms, petitioner released IBM from

liability for both contract and tort claims.    The release,

however, does not specifically indicate that the lump-sum payment

received by petitioner was paid to settle a potential personal

injury claim against IBM.    We note that where the settlement

agreement lacks express language stating what the settlement

amount was paid to settle, then the most important factor is the

intent of the payor.     Knuckles v. Commissioner, 349 F.2d 610, 612

(10th Cir. 1965), affg. T.C. Memo. 1964-33; Stocks v.
                               - 10 -


Commissioner, supra at 10.    Here, respondent argues, and we

agree, that IBM did not make the payment on account of a personal

injury.    The release form appears to be a standard document used

by IBM for all of its employees who participate in the ITO II

Program.    Moreover, the amount of the $52,169 lump-sum payment

was calculated on the number of years of service and petitioner's

salary.    Finally, the release states that if petitioner were

rehired by IBM, he could be required to repay some portion of the

lump-sum payment based on the number of weeks off the IBM payroll

compared with the number of weeks' salary used to calculate the

lump-sum payment.    As in Sodoma v. Commissioner, supra, and Webb

v. Commissioner, supra, the lump-sum payment herein appears to

have been severance pay rather than a payment for personal

injury.    Severance pay, just like the pay it replaces, is taxable

income.

     Finally, we note that petitioner has not alleged or come

forward with any evidence of the specific amounts of the payments

allocable to claims of tort or tort-type damages for personal

injuries.    Failure to do so results in the entire amount being

presumed to be taxable.    See Taggi v. United States, supra; Getty

v. Commissioner, 91 T.C. 160, 175-176 (1988), affd. as to this

issue and revd. on other issues 913 F.2d 1486 (9th Cir. 1990).

The release makes no allocation, and petitioner has not set forth

any facts upon which he would rely to prove an allocation.
                             - 11 -


Indeed, the fact that the $52,169 was based on time of service

and rate of pay points in the direction of its having been

severance pay rather than a payment for personal injury.    See

Webb v. Commissioner, supra, which involved the same payor and

substantially the same plan as involved herein.

     In sum, viewing the facts in a light most favorable to

petitioner, we conclude that respondent has made a prima facie

case to support a motion for summary judgment and that petitioner

has failed to come forward with countervailing assertions having

sufficient specificity to cause us to hold that there is any

material issue of fact which requires a trial.    Accordingly, we

hold that respondent's motion for summary judgment will be

granted.

     To reflect the foregoing,



                                 An appropriate order and decision

                         will be entered granting respondent's

                         motion for summary judgment.
