                   T.C. Summary Opinion 2001-156




                      UNITED STATES TAX COURT



         RONALD W. RAMEY AND JONI J. RAMEY, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1776-00S.              Filed September 26, 2001.



     Douglas S. Chiapuzio, for petitioners.

     Robert V. Boeshaar, for respondent.



     GERBER, Judge:   This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

at the time the petition was filed.1   The decision to be entered

is not reviewable by any other court, and this opinion should not

be cited as authority.


     1
       Unless otherwise indicated, all subsequent sections refer
to the Internal Revenue Code in effect for the year in issue.
                                  -2-

     Respondent determined a $5,164 deficiency in income tax for

petitioners’ 1995 taxable year.    The sole issue for our

consideration is whether proceeds received by Joni J. Ramey

(petitioner) in settlement of an action under the Fair Labor

Standards Act of 1938 (FLSA), ch. 676, secs. 1, 16(b), 52 Stat.

1060, current version at 29 U.S.C. secs. 201, 216(b) (1994), are

for personal injury or sickness and excludable from her gross

income under section 104(a)(2).

                             Background2

     In 1993, 267 employees (the class) of PayLess Drugstores,

Inc. (PayLess), filed a class action lawsuit under the FLSA in

the U.S. District Court for the District of Idaho (the lawsuit).

One of these employees was petitioner.

     The class alleged that, despite managerial-sounding titles

and job descriptions, they were, in fact, hourly employees who

were required to work overtime without compensation.    As relief,

the class sought to be paid time-and-a-half for all the hours

worked in excess of the statutory limit of 40 hours, liquidated

damages in an amount equal to the unpaid overtime compensation,

and attorneys’ fees and costs.

     In January 1995, the class action was settled for $5

million, and the plaintiffs sought judicial approval of the

settlement.    In a memorandum in support of their motion,


     2
         The facts were fully stipulated.
                               -3-

plaintiffs explained that the cash settlement was to be

distributed as follows:

               (1) All plaintiffs receive a $1,000.00
               allocation, appropriate individuals receive
               $3,000.00 deposition scheduling allocation,
               $5,000.00 deposition attending allocation and
               named plaintiffs receive a $15,000.00
               representation allocation.

               (2) Each individual’s claim is valued based
               on the fluctuating average workweek
               calculation.

               (3) The hours claimed are taken from the
               interviews of plaintiffs by plaintiff’s
               counsel.

               (4) The hourly rate is determined from
               PayLess payroll records.

               (5) All overtime hours and individual claims
               between two years prior to the consent date
               and November 1, 1992 are given 95% of
               calculated value to discount for a potential
               finding of no liability.

               (6) All overtime hours and individual claims
               for the time period between two and three
               years of their consent date are given 50% of
               calculated value to discount for a finding of
               no liability.

               (7) All overtime hours claimed for the time
               period between March 8, 1990 and three years
               prior to an individual’s consent date are
               given 5% of calculated value to recognize the
               limited, although existing, possibility that
               plaintiffs could have recovered for this time
               period.

               (8) The individual’s claim is then totaled.

               (9) The remaining portion of the settlement,
               that is, the total settlement minus the
               amount allocated for participation and back
               wages is apportioned the same ratio as that
               of each individual’s calculated back wages to
                                -4-

               the total of the calculated back wages for
               the class.

               (10) The sum of the participation allocation,
               the back wages allocation and the liquidated
               damages allocation equals each individual’s
               “Total Recovery.”

               (11) From the individual’s total recovery the
               contractual attorney fee is then subtracted.

               (12) Each individual is then allocated a
               share of the costs of the litigation based on
               the same ratio as that person’s total
               recovery to the total settlement proceeds.
               That share of the costs is then subtracted.

     The settlement allocation was approved by the court on

January 20, 1995.   On January 21, 1995, the plaintiffs entered

into a settlement agreement and release.   The agreement contains

the statement that “All Settlement Proceeds are paid to the

Plaintiffs on account of personal injuries”.   (Emphasis added).

Moreover, the release contains the following paragraph:

          3. Release of PayLess by the Plaintiffs

          In exchange for the payment of the amount set forth in
          paragraph 7 below * * * Plaintiffs * * * hereby release
          and discharge PayLess * * * from all actions, claims,
          or demands for damages, liabilities, costs, or
          expenses, which the Plaintiffs, individually or
          collectively, have against PayLess on account of, or in
          any way arising out of the claims that were asserted or
          that could have been asserted in the Lawsuit by the
          Plaintiffs, which Lawsuit is hereby acknowledged as not
          fully plead, [sic] further including, but not limited
          to, claims for personal injuries, intentional
          infliction of emotional distress, negligent infliction
          of emotional distress, and from all known claims,
          whether based in tort, statute or contract, which are
          based in whole or in part, or arise out of, or in any
          way relate to: (1) the Lawsuit; and (2) anything done
          or allegedly done by PayLess arising out of, or in
          conjunction with or relating to, the employment of any
          and/or all Plaintiffs prior to November 1, 1992 by
                                  -5-

          PayLess.
     On March 17, 1995, pursuant to the above settlement,

petitioner received a payment of $27,184.16 ($8,869.00 back

wages, $18,315 designated as liquidated damages) from which

attorney’s fees of $9,387 were deducted, for a net payment of

$17,797.16.3

     Petitioner did not report any portion of the $27,184.16 on

her 1995 income tax return.   Respondent determined that

petitioner must include the $27,184.16 in her 1995 gross income.

Respondent also allowed petitioner $8,663 as a miscellaneous

itemized deduction for attorney’s fees incurred to collect back

wages.

     Petitioner contends that the $27,184.16 settlement is not

includable in her gross income.    She argues that at least 50

percent of her award is attributable to a recovery for the

intentional and/or negligent infliction of emotional distress and

is excludable under section 104(a)(2).

     Respondent counters that the $27,184.16 in damages was not

paid on account of personal injuries.    Instead, respondent

contends that the settlement proceeds resulted from the claim set

forth in the complaint--the FLSA claim which does not provide for

personal injury compensation.   Respondent also contends that any


     3
       On brief, respondent argues that attorney’s fees should
not be excluded from petitioner’s gross income. However, the
question of whether attorney’s fees are excludable was not raised
by petitioners as an issue in this case. Accordingly, there is
no need to address respondent’s argument.
                                  -6-

settlement language to the contrary was a “naked attempt” to

qualify under section 104(a)(2) and therefore should be

disregarded.

                              Discussion

     Section 61 provides that all income from whatever source

derived is included in gross income, except as otherwise

provided.   This definition of gross income is broadly construed.

See Commissioner v. Schleier, 515 U.S. 323, 327-328 (1995).

Accordingly, any statutory exclusions from income must be

narrowly construed.     Id.

     One such exclusion, provided for in section 104(a)(2), is

that “damages [received] (whether by suit or agreement and

whether as lump sums or periodic payments) are excluded from

gross income if those damages were received on account of

personal injuries or sickness”.    However, two requirements must

be met.    Commissioner v. Schleier, supra at 337; sec. 1.104-1(c),

Income Tax Regs.   First, the claims from which the lawsuit arose

and upon which it settled, must be “based upon tort or tort type

rights.”    Commissioner v. Schleier, supra at 337.   Second, the

damages must have been received “on account of personal injuries

or sickness.”    Id.   For the exclusion to apply, both requirements

must be satisfied.4    Id.; Jacobs v. Commissioner, T.C. Memo.

     4
       It must be noted here that a “personal injury” is
different from an “economic injury”. A personal injury includes
nonphysical injuries such as those affecting emotions,
reputation, or character. United States v. Burke, 504 U.S. 229,
                                  -7-

2000-59.

The Nature of the Claim

     First we consider whether the claim settled was based upon a

tort or tort type cause of action.      From the record before us, we

consider the evidence, the stipulated facts, the complaint, and

the intent of the payor.     Threlkeld v. Commissioner, 87 T.C.

1294, 1306 (1986), affd. 848 F.2d 81 (6th Cir. 1988); Bent v.

Commissioner, 87 T.C. 236, 245 (1986), affd. 835 F.2d 67 (3d Cir.

1987); Church v. Commissioner, 80 T.C. 1104, 1107 (1983).

     There is no dispute that the 1993 complaint arose under the

FLSA to recover unpaid overtime compensation, liquidated damages,

attorney’s fees and costs.    It is well settled that an action

under the FLSA, in and of itself, is not based upon a tort or

tort type right.   See Jacobs v. Commissioner, supra.     The FLSA

was enacted to establish minimum wages and maximum hours for

employees and it does not provide for personal injury

compensation.   See Brooklyn Sav. Bank v. O’Neil, 324 U.S. 697,

707 (1945); Jacobs v. Commissioner, supra.      The only relief

available under the FLSA is the payment of back wages and

liquidated damages for excessive hours worked.     See 29 U.S.C.



235 n.6 (1992). But see Small Business Job Protection Act of
1996, Pub. L. 104-188, sec. 1605(a), 110 Stat. 1838, which
amended sec. 104(a)(2) to provide that for amounts received after
Aug. 20, 1996, a “personal injury” is limited to a physical
injury. On the other hand, an economic injury includes injuries
such as those arising out of the unlawful deprivation of either
full wages earned or the opportunity to earn them. Id.
                                  -8-

sec. 216(b) (1994).    These liquidated damages are intended to

compensate employees not for personal injury but for damages that

may be too obscure or difficult to estimate because of the delay

of wage payment.   See Overnight Motor Transp. Co. v. Missel, 316

U.S. 572, 583-584 (1942).

     Accordingly, if a claim arose solely under the FLSA,

petitioner would most likely fail to meet the test of

Commissioner v. Schleier, supra.     However, petitioner argues

that, along with the FLSA claim, another claim existed–-the

intentional and/or negligent infliction of emotional distress.5

Petitioner contends that this, and not the FLSA claim, was the

claim upon which the lawsuit was settled.

     Indisputably, no claims for personal injury were alleged in

the 1993 class action pleadings.    Nevertheless, petitioner points

out that under Pipitone v. United States, 180 F.3d 859, 863 (7th

Cir. 1999), the absence of an allegation does not bar the

existence of a tort claim or the ability of the parties to settle

upon it.



     We agree that claims need not be specifically enumerated to

be the basis of a settlement.    Nonetheless, the payor must be

aware of that claim.    Id.   Practically speaking, the complaint is


     5
       Petitioner claims that she experienced “dry heaves” and
had to take prescription Tagamet to prevent an ulcer. She also
claims that her marriage suffered because of job-related stress.
                                -9-

the easiest way to prove a payor’s awareness.   However, if a

payor’s awareness can be shown by other means, then the lack of a

formal complaint does not bar either the existence of that claim

or its ability to be the basis of a settlement.    Id.

     Petitioner argues that PayLess and its attorneys did know

about her claim for the intentional and/or negligent infliction

of emotional distress.   Petitioner claims that she told the class

action attorneys about her physical injury and sickness and that

this information was conveyed to PayLess’ attorneys during the

settlement negotiations.

     Petitioner argues that language in the settlement documents,

such as the release, reflects the attorneys’ knowledge of her

injuries.   In that regard, the release (a) acknowledges that the

“Lawsuit * * * [was] not fully plead” and (b) discharges PayLess

of any other claims “including, but not limited to, claims for

personal injuries, intentional infliction of emotional distress,

[and] negligent infliction of emotional distress.”   Petitioner

argues that because the discharge of the tort claims follows the

acknowledgment that the lawsuit was not fully pleaded, it proves

that PayLess and its attorneys knew and were admitting that the

tort claims existed and could still be pleaded.



     We acknowledge that this statement may indicate a

generalized knowledge of PayLess’ attorneys that injuries existed

within a broad class of claimants.    However, from looking at the
                                 -10-

language, there is no way to tell for certain that PayLess and

its attorneys knew of petitioner’s particular situation.    In

fact, this could merely be a concession made by PayLess’

attorneys to settle the claim quickly.    While this statement

benefited petitioner and other plaintiffs for tax purposes, it

made no difference to PayLess.    Moreover, when analyzing similar

release language in a previous case, we held that generic,

blanket type statements would not suffice.    Jacobs v.

Commissioner, supra.

     Accordingly, petitioner has failed to meet the first

requirement under Commissioner v. Schleier, 515 U.S. 323 (1995).

An action under the FLSA is not based upon a tort or tort type

right.   Additionally, petitioner has not shown that her claim for

the intentional and/or negligent infliction of emotional distress

existed so as to qualify for exclusion of damages under section

104(a)(2).

The Nature of the Damages

     Even if petitioner had shown that her claim of intentional

and/or negligent infliction of emotional distress existed, we

would still need to consider whether the damages were received on

account of that specific claim.    Under section 104(a)(2) it is

irrelevant that a tort claim existed if PayLess paid damages only

for the FLSA claim.    For this reason, there must be an actual

link between the claim of intentional and/or negligent infliction

of emotional distress and the amount paid.    Pipitone v. United
                                 -11-

States, supra at 865.

     In making this determination, we must examine the terms of

the agreement.   Id. at 863.    In particular, we examine the

agreement language that “all Settlement Proceeds * * * [were]

paid * * * on account of personal injuries.”    Petitioner contends

that this sentence irrefutably proves that part of the liquidated

damages were received on account of her personal injuries.

Petitioner further contends that under Bagley v. Commissioner,

105 T.C. 396, 406 (1995), affd. 121 F.3d 393 (8th Cir. 1997), we

must accept the terms of the parties’ agreement unless facts and

circumstances deem otherwise.

     Respondent counters that liquidated damages in a FLSA

lawsuit, by their very nature, are not and cannot be on account

of personal injuries.   See Overnight Motor Transp. Co. v. Missel,

supra at 583-584.   Rather, liquidated damages compensate

plaintiffs for back wages and incidental costs.     Id.   In light of

this, respondent contends that the inclusion of this language was

a “naked attempt [by the plaintiffs] to bring the proceeds under

* * * section 104(a)(2).”



     Despite petitioner’s contention that we must accept the

agreement’s terms, we cannot blindly accept labels which parties

attach to transactions.   See Robinson v. Commissioner, 102 T.C.

116 (1994), affd. in part, revd. in part 70 F.3d 34 (5th Cir.

1995); Peaco v. Commissioner, T.C. Memo. 2000-122.     More
                                -12-

importantly, the facts and circumstances in the record in this

case do not support petitioner’s claim.

     First, the language is not supported by the evidence in our

record.    We know that all proceeds were not paid on account of

personal injury.    Plaintiffs, in their memorandum in support of

the motion for judicial approval, allocated all settlement

proceeds according to back wages, attorney’s fees, and lawsuit

involvement.    We find it significant that there was no allocation

for personal injury when the parties to the class action

meticulously provided for all of the items involved in the FLSA

claim.    Petitioner dismisses this as a mere technicality.    We

cannot so easily ignore this aspect-–especially in light of the

fact that petitioner admits on brief that up to 50 percent of the

proceeds could have been received on account of the FLSA claim.

     Second, this language does not show a direct link between

the tort claim and a specific amount of money.    It is well

settled that “Failure to show the specific amount of the payment

allocable to the claims of tort or tortlike damages for personal

injuries results in the entire amount’s being presumed not to be

excludable.”    Wise v. Commissioner, T.C. Memo. 1998-4; see also

Jacobs v. Commissioner, T.C. Memo. 2000-59.

     Considering that exclusions from income (including those in

section 104(a)(2)) are narrowly construed, we cannot accept

petitioner’s contentions on this record that the uncorroborated

and equivocal statements in the agreement and release are
                                 -13-

sufficient to show petitioner’s personal injury or qualification

for exclusion.   Pipitone v. United States, 180 F.3d at 863-865,

(citing Kurowski v. Commissioner, 917 F.2d 1033, 1036 (7th Cir.

1990), affg. T.C. Memo. 1989-149).      We hold that the damages

received were on account of the FLSA for back wages, liquidated

damages, attorney’s fees and costs, and not for personal injury.

     To the extent not herein discussed, we have considered all

other arguments made by the parties and conclude they are moot or

without merit.

     To reflect the foregoing,

                                        Decision will be entered

                                 for respondent.
