                           T.C. Memo. 1998-4



                       UNITED STATES TAX COURT



            JOHN R. AND SARA E. WISE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6344-96.                       Filed January 5, 1998.



     John A. Mase, Howard S. Hou, and Mark A. Byrne, for

petitioners.

     Mark A. Weiner, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     JACOBS, Judge: Respondent determined a $283,425 deficiency in

petitioners' 1989 Federal income tax.    The sole issue for decision

is whether $1,012,233 received by John R. Wise as a result of the

termination of his employment is excludable from petitioners' 1989
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gross income pursuant to section 104(a)(2) as damages received on

account of personal injury or sickness.

     All section references are to the Internal Revenue Code as in

effect for the year in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.

                          FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.   The

stipulation of facts and the attached exhibits are incorporated

herein by this reference.

     John R. and Sara E. Wise resided in Northridge, California, at

the time the petition was filed. John R. Wise (petitioner) was born

on October 20, 1940.

Weyerhaeuser Co.

     In 1968, petitioner began working for Weyerhaeuser Co. (WC) as

a loan officer.    WC is in the home-building and mortgage business.

Petitioner later worked for Weyerhaeuser Mortgage Co. (WMC), a WC

subsidiary.   Petitioner rose through the ranks at WMC, and by the

late 1980's he became its president and chief executive officer.

At that time, WMC was the third or fourth largest mortgage company

in the United States.

     Petitioner also served in the late 1980's as chief executive

officer of Republic Federal Savings and Loan (RFSL), another WC

subsidiary, and as chairman of the board of directors of Mortgage

Investments Plus (MIP), a publicly owned real estate investment
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trust that made investments in commercial real estate. MIP was not

a WC subsidiary but was managed by WC.

      During the year in issue, petitioner managed all of WC's

financial     service     subsidiaries      and      was     responsible       for

approximately 2,000 employees.         He was one of the 10 most highly

compensated individuals at WC, earning a base salary of $279,232.56

in 1989.     Petitioner did not have a written contract with WMC or

WC.

      Although WC policy required that employees receive annual

employment    reviews,    petitioner   never      received    such   a   review.

Nevertheless, he always received bonuses when he became eligible.

       Between 1980 and April 1989, John W. Creighton served as

petitioner's immediate supervisor.          Mr. Creighton and petitioner

were close friends.       At the time of trial, Mr. Creighton was the

chief executive officer and chairman of the board of WC.

       Within WC's financial services chain of command, petitioner

was   the   number   3   person,   below    George    Weyerhaeuser       and   Mr.

Creighton.

Communications Before Petitioner's Termination

      In 1988, petitioner expressed a concern to Mr. Creighton that

because of the developing trend to consolidate in the mortgage

banking industry, there was a strong possibility that WC would

sell WMC, which might then leave petitioner unemployed. In response

to this concern, Mr. Creighton orally assured petitioner that WC
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would be "fair" with petitioner if WMC were sold.                   Petitioner was

not satisfied with this general assurance; he wanted a long-term

employment contract in writing, with a substantial severance pay

provision in the event of WMC's sale.

      From 1983 to 1989, the value of RFSL's assets increased from

$600 million to $2 billion.           Petitioner believed he was primarily

responsible for building and increasing the value of RFSL and of

WMC; therefore he wanted to be adequately compensated in the event

of WMC's sale. Mr. Creighton informed petitioner that a long-term

written employment contract would be forthcoming.

      In early 1989, Mr. Weyerhaeuser announced to WC's senior

management that the company had decided to liquidate its noncore

businesses.      WMC and RFSL were part of WC's noncore enterprises.

      Mr.   Creighton     and    petitioner      continued    their    discussions

regarding    a   long-term      employment     contract    for      petitioner.     On

January 4, 1989, petitioner wrote a letter to Mr. Creighton,

memorializing petitioner's understanding of the proposed employment

contract they had discussed.          Petitioner understood that the terms

of   the    forthcoming    contract     would     include:     (1)    A   provision

entitling    petitioner     to    a   $280,000    annual     base    salary   and    a

guaranteed incentive bonus of $70,000 annually over a period of 5

years; and (2) a severance package equal to 3 years of salary, or

$1 million, in the event of WMC's sale.            Petitioner did not receive
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a written response from Mr. Creighton. However, petitioner was

repeatedly assured he would receive a written contract.

The Termination

      On a Friday evening sometime in April 1989, Mr. Creighton

telephoned petitioner to inform petitioner that his employment with

WMC was being terminated effective immediately. Petitioner inquired

as   to    the   amount   WC    would   pay     him     in   connection    with   the

termination of his employment. Mr. Creighton offered petitioner

approximately      $560,000.1       Petitioner         rejected   Mr.    Creighton's

offer.

      The following day Mr. Creighton telephoned petitioner again,

offering approximately $700,000 in connection with the termination

of petitioner's employment. Petitioner rejected this second offer,

suggesting that he would only accept a figure greater than $1

million.     Mr.   Creighton      replied       that    he   would   discuss      this

counteroffer with Mr. Weyerhaeuser.

      On    Sunday,   the      following    day,       Mr.   Creighton    telephoned

petitioner, offering $1,125,000 in connection with the termination

of petitioner's employment.              Petitioner accepted this offer.



      1
          It appears that Mr. Creighton computed the $560,000
figure by multiplying petitioner's annual salary by two. This
amount was far in excess of the amount called for by WC's formal
severance pay plan. (According to the severance pay plan in
effect at the time, qualified individuals were "eligible to
receive one weeks' [sic] earnings up to a maximum of eight weeks'
earnings, for each year of credited service".)
                                       - 6 -


     At the time petitioner's employment was terminated, he had

been employed by WC for approximately 21 years.

Settlement Agreement and General Release

     Following    petitioner's          acceptance    of   Mr.    Creighton's

$1,125,000    offer,       attorneys   became   involved   in    drafting   the

settlement agreement.        Petitioner's attorney attempted to insert a

statement in the draft agreement that the $1,125,000 payment was in

consideration for tort liabilities. WC's assistant general counsel

specifically refused to acknowledge that WC's $1,125,000 payment to

petitioner was in consideration for any tort liabilities.

     On May 16, 1989, petitioner and Mr. Creighton (on WC's behalf)

signed a Settlement Agreement and General Release of All Claims

(General Release). Pursuant to the General Release, petitioner was

paid $1,125,000 in consideration for releasing all potential causes

of action against WC and WMC.          In this regard, the General Release

stated:

          The Cash Payment shall represent full and
          complete satisfaction, settlement and release
          by Wise of any and all claims he has or may
          have against any entity in the Weyerhaeuser
          Group, or any director, officer of [sic]
          employee of any entity in the Weyerhaeuser
          Group for salary, bonus and other incentive
          compensation,    severance    pay   or    other
          compensation based on termination of employment
          and accrued and unpaid vacation pay.

          *            *         *        *       *        *       *

               Wise does as of the Effective Date release
          Weyerhaeuser, each subsidiary of Weyerhaeuser,
          and each director, officer, employee and agent
                              - 7 -


          of   Weyerhaeuser   and  each    subsidiary  of
          Weyerhaeuser, from any and all claims that Wise
          has asserted or could assert under federal,
          state or municipal laws, executive orders, or
          any federal, state or municipal regulations or
          rules based on, arising out of, or relating to
          his employment by WMC, the termination of such
          employment, his service as a director or
          officer of any subsidiary of Weyerhaeuser or
          the termination of such service, including,
          without    limitation,    claims    under   age
          discrimination laws of the United States or the
          State of California, claims of intentional or
          negligent injury, and claims for back or future
          wages, compensation or benefits, except as
          provided for in Section 1 of this Agreement,
          claims of right or entitlement to reinstatement
          of employment by WMC or any other entity in the
          Weyerhaeuser Group as to any position or job
          whatsoever, claims of negligent, intentional or
          unintentional infliction of emotional distress,
          claims based on oral or written contracts of
          employment, claims based on discrimination laws
          of the United States and claims for attorney's
          fees and costs, as a prevailing party or
          otherwise, and claims for damages for pain and
          suffering, personal injury and consequential
          damages except for claims based on breach of
          this Agreement.

     In addition to petitioner's release of all claims against WC,

petitioner agreed to resign from his position as a director and

officer of MIP. Petitioner also resigned from his position at RFSL.

     Petitioner did not suffer any injury or sickness at the time

he entered into the settlement agreement.

Petitioners' 1989 Federal Income Tax Return

     On their 1989 Federal income tax return petitioners included

in income $112,767 of the $1,125,000 settlement payment petitioner

received from WC.   (Petitioner arrived at the $112,767 amount by
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using a 1 week's pay per year of service method.)            Petitioners

provided the following explanation on the last page attached to

their return: "Other Disclosure: The taxpayer received 1012233 from

Weyerhaeuser Co. as settlement for mental anxiety and injury to

personal reputation caused upon termination of employment."

Notice of Deficiency

     In the notice of deficiency, respondent determined that the

entire $1,125,000 settlement payment petitioner received from WC is

includable in petitioners' 1989 gross income.

                               OPINION

     The sole issue for decision is whether $1,012,233 ($1,125,000

less $112,767) received by petitioner as a result of the termination

of his employment is excludable from petitioners' 1989 gross income

pursuant to section 104(a)(2) as damages received on account of

personal injury or sickness.       Petitioners argue that they are

entitled to exclude that amount.      Respondent disagrees.

     Except as otherwise provided, gross income includes income from

all sources.   Sec. 61; Commissioner v. Glenshaw Glass Co., 348 U.S.

426, 429-430 (1955).      Although section 61(a) is to be broadly

construed,   statutory   exclusions   from   income   must   be   narrowly

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

     Pursuant to 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
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personal injuries or sickness".     The regulations provide that "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."        Sec. 1.104-

1(c), Income Tax Regs. Thus, in order to exclude damages from gross

income pursuant to section 104(a)(2), the taxpayer must prove that:

(1) The underlying cause of action is based upon tort or tortlike

rights, and (2) the damages were received on account of personal

injuries or sickness.    Commissioner v. Schleier, supra at 336-337.

     Where amounts are received pursuant to a settlement agreement,

the nature of the claim that was the actual basis for settlement

controls whether such amounts are excludable from gross income under

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

(1992). The crucial question is "in lieu of what was the settlement

amount paid?"    Bagley v. Commissioner, 105 T.C. 396, 406 (1995),

affd. 121 F.3d 393 (8th Cir. 1997). Determining the nature of the

claim is a factual inquiry. Robinson v. Commissioner, 102 T.C. 116,

127 (1994), affd. in part, revd. in part and remanded 70 F.3d 34

(5th Cir. 1995).

     In the instant case, it is unclear that the General Release

included   a    settlement   of   petitioner's   claims   for   wrongful

termination rather than a general severance package.            But even

assuming arguendo that it did include a settlement for some type of
                                  - 10 -


wrongful termination, petitioners are not entitled to exclude from

income any part of the proceeds received.

      Petitioners have not proven what portion, if any, of the

$1,125,000 payment was received in settlement of tort or tortlike

claims.    The General Release does not make any allocation between

tort (or tortlike) claims and other types of claims.            The General

Release identifies many potential claims which could be interpreted

as sounding in contract or in tort.        Thus, from the record before

us   it   is   impossible   to   differentiate   the   actual   basis   for

settlement.    And 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.     See Taggi v. United States, 35 F.3d 93, 96 (2d Cir.

1994); Getty v. Commissioner, 91 T.C. 160, 175-176 (1988), affd. on

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

      Petitioner asserts that the General Release settled his claim

for damages for personal injuries. We do not agree. The General

Release does not state that the amount petitioner received was paid

to settle a potential personal injury claim against WC.           And where

a 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,

612-613 (10th Cir. 1965), affg. T.C. Memo. 1964-33.
                               - 11 -


     WC did not identify a portion of the payment as a settlement

of a claim on account of a personal injury.       The payment herein

appears to be in the nature of taxable severance pay rather than a

payment for personal injury.   We believe it is no coincidence that

the settlement payment to petitioner approximates the amount of

severance pay Mr. Creighton and petitioner had discussed as an

essential term in the long-promised employment contract. (The

settlement amount was slightly over four times petitioner's then-

current base salary.)   Severance pay is taxable income.   Brennan v.

Commissioner, T.C. Memo. 1997-317.

     Undoubtedly, petitioner was affected by WC's actions; however,

he has made no showing of any specific tort or personal injury.

Although wrongful employment termination possibly may result in

personal injury, the amount of lost wages received in such cases is

generally not linked to that personal injury, and, thus, such an

award will not qualify for the exclusion from gross income provided

in section 104(a)(2).   Commissioner v. Schleier, supra at 330.    In

this case, there is no link to personal injury.

     Petitioner contends that Banks v. United States, 81 F.3d 874

(9th Cir. 1996), is controlling.        We disagree.   In Banks, the

taxpayer was employed as a steel worker. He was punched by a fellow

employee who was a former boxer, rendering Mr. Banks unconscious and

requiring 32 stitches to repair a wound to his forehead.          The

company attempted to discharge Mr. Banks and his fellow employee for
                                       - 12 -


fighting.       The union filed a grievance on Mr. Banks' behalf and

subsequently settled the matter; Mr. Banks objected to the terms of

the agreement.       He then sued the union for breach of its duty of

fair representation.           Mr. Banks prevailed on that cause of action

in the district court and agreed to settle with the union before the

entry of judgment.

       Mr. Banks did not report as income the amount he received from

the union, and after examination and assessment, he paid the tax and

sued for a refund.        He prevailed in the District Court, where the

court held that the settlement was of a tortlike cause of action and

the sum paid for the breach of duty of fair representation was on

account    of    personal      injuries      within   the     meaning    of    section

104(a)(2).      Banks v. United States, 94-2 USTC par. 50,630 (W.D.

Wash. 1994).        The U.S. Court of Appeals for the Ninth Circuit

affirmed, noting that "Unions do not pay wages to their members, and

what the Union paid in settlement here to Banks did not constitute

wages."    81 F.3d at 876.

       In this case, the $1,125,000 settlement payment compensated

petitioner for his 21 years of past service in building the value

of WMC and related entities, as well as for his amicable severance

of     employment    from      WC    generally.        See,      e.g.,   Britell     v.

Commissioner, T.C. Memo. 1995-264. Petitioner has not demonstrated

what    injuries    he   had    or   might    have    had   as    a   result   of   his

termination.       Petitioner did not testify as to why he believed he
                              - 13 -


was terminated.   Indeed, he simply failed to present any evidence

that the settlement he received included a settlement of a tortlike

cause of action on account of personal injuries or sickness.

     We have considered all of petitioners' other arguments and, to

the extent not discussed above, find them to be without merit.

      In sum, the entire $1,125,000 settlement payment petitioner

received is includable in petitioners' 1989 gross income.

     To reflect the foregoing,



                                        Decision will be entered

                                   for respondent.
