                  T.C. Summary Opinion 2003-14



                     UNITED STATES TAX COURT


                 VIRGIE R. PORTER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 8842-01S.            Filed February 25, 2003.


     Virgie R. Porter, pro se.

     Kathleen C. Schlenzig, for respondent.



     POWELL, Special Trial Judge:   This case was heard pursuant

to the provisions of section 74631 of the Internal Revenue Code

in effect at the time the petition was filed.    The decision to be

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

should not be cited as authority.

     Respondent determined a deficiency of $17,641 and an

accuracy-related penalty under section 6662(a) of $3,528 in


     1
        Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year in issue.
                                - 2 -

petitioner’s 1998 Federal income tax.     The issues are (1) whether

petitioner may exclude from gross income under section 104(a)(2)

payments received from her former employer pursuant to a

settlement agreement, and (2) whether petitioner is liable for

the accuracy-related penalty under section 6662(a).     Petitioner

resided in Evergreen Park, Illinois, at the time the petition was

filed.

                            Background

     Dobbs International Services (Dobbs) hired petitioner in

April of 1993 as a service employee at O’Hare International

Airport.   Every October, Dobbs required all employees to “bid”

for job positions with the company.     The bidding process was

based on seniority, and Dobbs granted the most senior employees

the right to bid for a job position first.     Petitioner alleged

that in October of 1993, a manager at Dobbs granted a male

employee, with less seniority than petitioner, the right to bid

for petitioner’s job position before her.     As a result,

petitioner lost her position as service employee, and Dobbs

placed her in an on-call position.

     Petitioner filed her first complaint with the Equal

Employment Opportunity Commission (EEOC) on December 8, 1993.

The complaint stated in part:

     III. I believe that I have been discriminated against on the
     basis of my sex, female, in violation of Title VII of the
     1964 Civil Rights Act, in that I was denied the opportunity
     to bid on a position for which male employees were allowed
                                   - 3 -

     to bid, and in that [Dobbs] stated that certain positions
     are not available to females.

     On June 23, 1994, while petitioner was in the on-call

position, Dobbs asked her to report to work.         At that assignment,

petitioner slipped on grease, dislocating her shoulder and

injuring her lower back.       Petitioner filed a workmen’s

compensation claim against Dobbs as a result of her injuries.           In

August of 1995, Dobbs agreed to pay petitioner $5,820.96 in

settlement of that claim.

     Subsequently while petitioner was on-call, Dobbs attempted

to notify petitioner that work was available.        After failing to

reach her by telephone, Dobbs terminated petitioner.        Petitioner

filed a second complaint with the EEOC on March 14, 1995.         The

complaint stated in part:

     III. I believe that I have been discriminated against
     because of my sex, female in violation of Title VII of the
     Civil Rights Act of 1964, as amended, and retaliated against
     in violation of 704(a) of the Act, in that I had filed a
     previous charge of discrimination and am treated different
     than male employees. Male employees have been placed on the
     on-call list and on lay off and were not terminated while on
     this list due to lack of contact.

     On October 7, 1998, Dobbs and petitioner entered into a

settlement agreement.   The settlement agreement stated in part:

     An investigation having been made under Title VII of the
     Civil Rights Act of 1964, as amended (Title VII), by the
     U.S. Equal Employment Opportunity Commission (EEOC) and
     reasonable cause having been found, the parties do resolve
     and conciliate this matter as follows:

     *        *            *           *         *            *          *
                                 - 4 -

                         CHARGING PARTY RELIEF

          [Dobbs] agrees that within 30 days of the effective
     date of this Agreement it shall:

          1.   a. Pay to the Charging Party the sum of twelve
     thousand dollars ($12,000.00) as back wages, less legal
     deductions for taxes;[2]

               b. Pay to the Charging Party the sum of seventy-
     one thousand and six hundred dollars ($71,600.00) as
     damages. Charging Party shall be liable for any and all
     taxes which may be due for this payment.

     In preparing her 1998 Federal income tax return, petitioner

excluded the $71,600 damage award that she received.     Petitioner

argues that the damage award is excludable from her gross income

under section 104(a)(2) because it was received on account of her

physical personal injury.

                              Discussion

     Section 61 provides that “gross income means all income from

whatever source derived”.    Gross income is an inclusive term with

broad scope, designed by Congress to “exert * * * ‘the full

measure of its taxing power.’” Commissioner v. Glenshaw Glass

Co., 348 U.S. 426, 429 (1955) (quoting Helvering v. Clifford, 309

U.S. 331, 334 (1940)).    Conversely, statutory exceptions from

income shall be narrowly construed.      Commissioner v. Schleier,

515 U.S. 323, 328 (1995).    Furthermore, “exemptions from taxation




     2
        The taxability of the $12,000 petitioner received as back
wages is not in dispute.
                                 - 5 -

are not to be implied; they must be unambiguously proved.”

United States v. Wells Fargo Bank, 485 U.S. 351, 354 (1988).

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

any damages (other than punitive damages) received (whether by

suit or agreement and whether as lump sums or as periodic

payments) on account of personal physical injuries or physical

sickness”.   Section 1.104-1(c), Income Tax Regs., defines

“damages received” as “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.”    Amounts are

excludable from gross income only when (1) the underlying cause

of action giving rise to the recovery is based on tort or tort

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

personal injuries or sickness.     Commissioner v. Schleier, supra

at 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 under

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

(1992).   Determination of the nature of the claim is a factual

inquiry and is generally made by reference to the settlement

agreement.   Robinson v. Commissioner, 102 T.C. 116, 126 (1994),

affd. in part and revd. in part 70 F.3d 34 (5th Cir. 1995).
                                   - 6 -

“[W]here an amount is paid in settlement of a case, the critical

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).    An important factor in determining the

validity of the agreement is the “intent of the payor” in making

the payment.     Knuckles v. Commissioner, 349 F.2d 610, 613 (10th

Cir. 1965), affg. T.C. Memo. 1964-33.       If the payor’s intent

cannot be clearly discerned from the settlement agreement, the

intent of the payor must be determined from all the facts and

circumstances of the case, including the complaint filed and

details surrounding the litigation.        Robinson v. Commissioner,

supra at 127.3

     In Laber v. Commissioner, T.C. Memo. 1997-559, the taxpayer

filed eight EEOC complaints against his former employer.       The

settlement agreement did not allocate the damage award, nor did

the taxpayer allege in any of the eight complaints personal

injury or sickness that occurred as a result of the alleged

discrimination.    We held the settlement award was not excludable

under section 104(a)(2).     Id.

     Similarly, petitioner did not allege physical injury or

sickness in her complaints filed with the EEOC.       Petitioner,

however, argues that the $71,600 damage award represented


     3
        Sec. 7491(a), concerning burden of proof, has no bearing
on the underlying substantive issue. Respondent has satisfied
the burden of production with respect to the accuracy-related
penalty under sec. 6662. See sec. 7491(c).
                                 - 7 -

compensation for her personal physical injury in that she

suffered “pain and suffering from not being able to pay my bill,

not being able to work and knowing the fact that I was

discriminated against”.   Further, petitioner argues that the

damage award was additional compensation for her injuries when

she slipped on grease at work.    Petitioner reasons that, if Dobbs

had not sexually discriminated against her, Dobbs would not have

placed her on the on-call list and assigned her to a position

where she received physical injuries.

     The flush language of section 104(a) provides that “For

purposes of paragraph (2), emotional distress shall not be

treated as a physical injury or physical sickness.”   Thus,

assuming petitioner did receive damages for her pain and

suffering as a result of the employment discrimination, they

would not be excludable under section 104(a)(2).   As to her

personal physical injury, Dobbs compensated petitioner in a

separate workmen’s compensation claim brought by her, and we

decline to follow petitioner’s tenuous nexus between the

discrimination and the personal injury.

     We find that petitioner failed to establish that any amount

of the settlement proceeds was based on personal physical

injuries or sickness, and, thus, hold that the $71,600 damage

award is not excludable under section 104(a)(2).
                                 - 8 -

     Section 6662 imposes an accuracy-related penalty “equal to

20 percent of the portion of the underpayment” of tax

attributable to “Any substantial understatement of income tax.”

Sec. 6662(a) and (b)(2).    A substantial understatement of income

tax exists if the amount of the understatement for the taxable

year exceeds the greater of 10 percent of the tax required to be

shown on the return for the taxable year, or $5,000.       Sec.

6662(d)(1)(A).

     However, “No penalty shall be imposed * * * if it is shown

that there was a reasonable cause * * * and that the taxpayer

acted in good faith”.    Sec. 6664(c).     Petitioner failed to

address the accuracy-related penalty at trial and offered no

evidence that she had reasonable cause for the understatement or

acted in good faith.    Accordingly, we sustain respondent’s

determination.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,

                                         Decision will be entered

                                 for respondent.
