                  T.C. Memo. 2000-98



                UNITED STATES TAX COURT



            MARSHA M. BLAND, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 24846-97.                   Filed March 22, 2000.



     In connection with a corporate reorganization and
consequent termination of her employment, P
participated in an enhanced severance program offered
to eligible employees. Under this program, P received
a lump-sum payment, calculated based upon rate of pay
and years of service, in return for signing a general
release of all claims against her employer. An
identical payment formula was applied and release
document signed in the case of each participating
employee. P excluded this payment from income, and R
determined a deficiency for taxes attributable thereto.
P contends that the payment was received in settlement
of and to compensate for emotional distress she
suffered as a result of sexual harassment in the
workplace and, therefore, is excluded from income
pursuant to sec. 104(a)(2), I.R.C.

     Held: The payment received by P is not excludable
from income under sec. 104(a)(2), I.R.C., as damages
received on account of personal injuries or sickness.
                                 - 2 -

       Kevin Burke and Leonard Leighton, for petitioner.

       Elizabeth A. Owen, for respondent.



                          MEMORANDUM OPINION


       NIMS, Judge:   Respondent determined a Federal income tax

deficiency for petitioner’s 1994 taxable year in the amount of

$13,816.    Respondent also determined an accuracy-related penalty

of $2,765 for 1994, pursuant to section 6662(a).    After

concessions, the sole issue for decision is whether a $58,845

payment received by petitioner from her employer, in connection

with the termination of her employment, is excluded from income

under section 104(a)(2).

       Unless otherwise indicated, all section references are to

sections of 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.

       This case was submitted fully stipulated pursuant to Rule

122.    The stipulations of the parties, with accompanying

exhibits, are incorporated herein by this reference.

                              Background

       Marsha M. Bland resided in Las Vegas, Nevada, at the time of

filing her petition in this case.    Prior to and during the year
                                 - 3 -

in issue, petitioner resided in Oklahoma and, from July 17, 1970,

to August 1, 1994, was employed by Public Service Company of

Oklahoma (PSC).

     In late 1986 or early 1987, petitioner was transferred

within the PSC organization from an administrative position to a

field personnel position.    She alleges that shortly thereafter

she began to experience instances of sexual discrimination and

harassment.    Petitioner characterizes her work environment as

tainted by inappropriate and unprofessional negative comments, by

offensive and harassing jokes, by disruptive behavior on the part

of male workers and supervisors (throwing plastic cups at

petitioner during a lecture she was attempting to present), and

by greater restrictions on her ability to “call out” additional

workers when needed for a job.    We note, however, that because

this testimony was presented only in the form of a written

stipulation as to what petitioner would say if called as a

witness, the Court was deprived of any opportunity to assess

credibility.    We therefore summarize petitioner’s averments

without making a determination regarding their veracity but for

purposes of showing her position.

     Prior to 1994, petitioner made complaints to PSC’s Equal

Employment Opportunity Consultant and Director of Human Resources

regarding incidents of harassment by her male coworkers.    She
                              - 4 -

also sent a letter to her supervisor, in response to an

unfavorable performance review, which included the following

language:

           Your memo asks for action plans on meeting your
     expectations, I don’t feel this is possible. Whatever
     your reasons are, as you have stated your [sic] not
     sure a woman could ever do this job as well as a man.
     * * * This entire process has been an ongoing
     harrassment [sic] without constructive consequences. I
     want to know what alternatives if any are open to me.
     I feel that for the past twenty years that [I] have
     done a good job wherever I have worked. I like my job
     I have now, but do not feel this continued and
     unjustified intimidation can or should be tolerated.
     * * *

Petitioner further asserts that she told the Equal Employment

Opportunity Consultant that she was going to bring a lawsuit

against the company, but she did not at any time file suit

against PSC on the basis of gender discrimination or other

claims.

     Petitioner additionally suffered physical problems during

the period she was employed as a field supervisor.   She was

hospitalized three times, for chest pain, pneumonia, and

abdominal pain, respectively, and she experienced continuing

difficulty with breathing and asthma.   Petitioner attributes

these ailments to work-related stress and maintains that the

problems ceased after she left PSC.

     In 1994, as part of a corporate reorganization in which

unnecessary positions were eliminated, eligible PSC employees

were offered an opportunity to participate in an Enhanced
                                - 5 -

Severance Plan.    Employees electing to so participate received a

lump-sum payment representing 2-1/2 weeks of pay per year of

service, in exchange for signing the Enhanced Severance Plan Full

Waiver and Release of Claims.    Employees choosing not to sign the

waiver received an Involuntary Termination Benefit.

     Petitioner, as an eligible employee, signed the Enhanced

Severance Plan Full Waiver and Release of Claims on June 16,

1994.    The terms of this waiver are set forth in relevant part

below:

                       Enhanced Severance Plan
                  Full Waiver and Release of Claims

     In exchange for the benefits of the Central and South
     West Corporation’s Enhanced Severance Plan, I hereby
     waive and release any and all claims that I may have
     against Central and South West Corporation, Public
     Service Company of Oklahoma, Central Power & Light
     Company, West Texas Utilities Company, Southwestern
     Electric Power Company, Transok, Inc., CSW Energy,
     Inc., and CSW Development I, or any of their respective
     officers, owners, directors, employees, agents,
     insurers, subsidiaries, and assigns (hereinafter
     collectively referred to as the “Company”) in any way
     arising out of the termination of my employment with
     the Company. This Release includes, without
     limitation, any claim arising under the Age
     Discrimination in Employment Act of 1967, the Civil
     Rights Acts of 1964 and 1991, the Labor Management
     Relations Act, the Americans with Disabilities Act, any
     applicable state civil rights act, any other federal or
     state statute or local ordinance, or any common law
     cause of action including, without limitation, claims
     for breach of contract, wrongful discharge, personal
     injury or any claim for attorneys’ fees.

     I agree not to bring any lawsuit or proceeding against
     the Company for any matter in any way arising out of
     the termination of my employment. I understand that
     this Release precludes me from recovering any relief as
                                - 6 -

       a result of any charge, lawsuit, or proceeding brought
       by me or on my behalf in any way arising out of the
       termination of my employment.

       No negotiations preceded petitioner’s signing of the

release, and she thereafter received a payment of $58,947 from

PSC.    This amount reflected 2-1/2 weeks of petitioner’s pay times

her years of service, for a gross sum of $63,097, less taxes

withheld.    PSC reported the payment as Form W-2, Wage and Tax

Statement, income.    On her 1994 Federal income tax return,

petitioner excluded $58,845 from gross income, with the

discrepancy presumably resulting from a computational error.

Because respondent’s subsequent notice of deficiency was based

upon the $58,845 figure, the parties are referring to and

treating the payment as a $58,845 payment, and we do likewise for

purposes of our discussion.

                              Discussion

       We must decide whether the $58,845 received by petitioner in

conjunction with her termination from PSC is excluded from income

as compensation for injuries or sickness pursuant to section 104.

I.   General Rules

       As a general rule, the Internal Revenue Code imposes a

Federal tax on the taxable income of every individual.    See sec.

1.   Section 61(a) specifies that “Except as otherwise provided”,

gross income for purposes of calculating such taxable income

means “all income from whatever source derived”.    Compensation
                                - 7 -

for services, which by regulation includes severance or

termination pay, is expressly encompassed within this broad

definition.   See sec. 61(a)(1); sec. 1.61-2(a)(1), Income Tax

Regs.

     Section 104, in contrast, provides otherwise with respect to

compensation for injuries or sickness and, in pertinent part,

reads as follows:

     SEC. 104.   COMPENSATION FOR INJURIES OR SICKNESS.

          (a) In General.--Except in the case of amounts
     attributable to (and not in excess of) deductions
     allowed under section 213 (relating to medical, etc.,
     expenses) for any prior taxable year, gross income does
     not include--

                 *    *    *    *       *   *   *

               (2) 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 104(a)(2) was amended by section 1605(a) of the Small

Business Job Protection Act of 1996, Pub. L. 104-188, 110 Stat.

1755, 1838, generally effective for tax years beginning after

December 31, 1996.)

     Regulations promulgated under section 104 further define

“damages received (whether by suit or agreement)” 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.”    Sec. 1.104-1(c), Income Tax Regs.
                               - 8 -

      For purposes of applying the above statutory and regulatory

text, the U.S. Supreme Court in Commissioner v. Schleier, 515

U.S. 323, 336-337 (1995), established a two-pronged test for

ascertaining a taxpayer’s eligibility for the section 104(a)(2)

exclusion.   As stated by the Supreme Court:   “First, the taxpayer

must demonstrate that the underlying cause of action giving rise

to the recovery is ‘based upon tort or tort type rights’; and

second, the taxpayer must show that the damages were received ‘on

account of personal injuries or sickness.’”    Id. at 337.

II.   Contentions of the Parties

      Petitioner contends that the payment she received from PSC

satisfies both prerequisites for excludability under section

104(a)(2).   According to petitioner, at the time of her

termination she possessed a claim against PSC under Oklahoma law

for the tort of intentional infliction of emotional distress,

thereby meeting the requirement of an underlying claim based on

tort or tort type rights.   Petitioner then maintains that because

PSC was aware of her complaints when the severance plan was

offered and executed, PSC intended by that vehicle to settle her

personal injury claims.   Hence, in petitioner’s view, the subject

funds were received on account of her personal injuries.

Petitioner further argues that, since her only complaint against
                               - 9 -

PSC was a tort claim for personal injuries, the full amount of

the payment is attributable to settlement of that claim, and no

allocation is necessary.

     Conversely, respondent asserts that the $58,845 received by

petitioner was paid neither in settlement of a tort type claim

nor on account of personal injuries.   Respondent avers that

because the release by its terms waives only claims arising out

of petitioner’s termination, and because her tort claims arise

out of incidents of alleged harassment during the course of her

employment, such claims did not underlie the severance agreement.

Respondent additionally contends that the lack of negotiations,

the use of a general release, and the calculation of payment

based on salary and years of service establish that PSC did not

intend the $58,845 to compensate petitioner for specific personal

injuries.   Lastly, it is respondent’s position that even if some

part of the payment were intended to settle petitioner’s personal

injury claims, all proceeds are nonetheless taxable due to the

absence of any basis for allocation between damages for personal

injuries and other, nonexcludable, damages.

     We conclude, for the reasons explained below, that

petitioner has failed to establish her entitlement to the

exclusion treatment afforded by section 104(a)(2).   The $58,845

payment she received from PSC is therefore subject to taxation

under the general rule of section 61(a).
                                - 10 -

III.    Application

       A.   Tort or Tort Type Rights

       As indicated above, the first requirement for the section

104(a)(2) exclusion is that the claim underlying the funds

received must be based on tort or tort type rights.    See

Commissioner v. Schleier, supra at 337.    A tort is defined as a

“‘civil wrong, other than breach of contract, for which the court

will provide a remedy in the form of an action for damages.’”

United States v. Burke, 504 U.S. 229, 234 (1992) (quoting Keeton

et al., Prosser and Keeton on the Law of Torts 2 (1984)).    Where

amounts are received pursuant to a settlement agreement, the

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

controls excludability.     See Fabry v. Commissioner, 111 T.C. 305,

308 (1998); Stocks v. Commissioner, 98 T.C. 1, 10 (1992); Metzger

v. Commissioner, 88 T.C. 834, 847 (1987), affd. without published

opinion 845 F.2d 1013 (3d Cir. 1988).

       State law typically determines the nature of the legal

interests involved.     See Massot v. Commissioner, T.C. Memo. 2000-

24.    The claim must be bona fide, but it need not be sustainable

or valid.     See Fabry v. Commissioner, supra at 308; Stocks v.

Commissioner, supra at 10; Metzger v. Commissioner, supra at 847.

The claim additionally need not have been asserted prior to the

settlement, but lack of knowledge of the claim on the part of the
                               - 11 -

payor may indicate a lack of intent to settle such a claim.    See

Gajda v. Commissioner, T.C. Memo. 1997-345, affd. 158 F.3d 802

(5th Cir. 1998); Brennan v. Commissioner, T.C. Memo. 1997-317.

     Here, intentional infliction of emotional distress, which

petitioner contends she suffered while employed by PSC, is

recognized as a tort under Oklahoma law.    See Eddy v. Brown, 715

P.2d 74, 76 (Okla. 1986) (adopting the description of intentional

infliction of emotional distress set forth in Restatement, Torts

2d, sec. 46 (1977)).    This Court has likewise acknowledged

infliction of emotional distress as a tortlike claim for purposes

of section 104(a)(2).    See Massot v. Commissioner, supra; Gajda

v. Commissioner, supra; Brennan v. Commissioner, supra.    We thus

are willing to assume for purposes of this litigation that

petitioner possessed a bona fide tort claim against PSC for

emotional distress experienced as a result of gender

discrimination.   Therefore, in so assuming that petitioner had a

tort claim which could have provided the basis for a settlement,

we turn to the question of whether the payment she received was

actually made to settle such claim, to compensate petitioner for

personal injuries suffered as a result of the alleged tort.

     B.   On Account of Personal Injuries

     As used in section 104(a)(2), personal injury encompasses

harms both tangible and intangible, both physical and

nonphysical.   See Commissioner v. Schleier, 515 U.S. at 329 n.4;
                                - 12 -

United States v. Burke, supra at 235 n.6; Fabry v. Commissioner,

supra at 309.    The Supreme Court has also noted specifically with

regard to discrimination that “the intangible harms of

discrimination can constitute personal injury, and * * *

compensation for such harms may be excludable under § 104(a)(2).”

Commissioner v. Schleier, supra at 332 n.6.     Intangible harms

recognized as within the scope of the statute include those

affecting emotions, reputation, or character.    See United States

v. Burke, supra at 235 n.6; Fabry v. Commissioner, supra at 309.

Hence, as a threshold matter, we acknowledge that petitioner’s

alleged injuries are personal in nature.

     However, because exclusion under section 104(a)(2) depends

not only on the nature of the injuries but also on the purpose of

the payment, “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).    In the words of

this Court:     “If the settlement agreement lacks express language

stating that the payment was (or was not) made on account of

personal injury, then the most important fact in determining how

section 104(a)(2) is to be applied is ‘the intent of the payor’

as to the purpose in making the payment.”     Metzger v.
                                - 13 -

Commissioner, supra at 847-848 (quoting Knuckles v. Commissioner,

349 F.2d 610 (10th Cir. 1965), affg. T.C. Memo. 1964-33); see

also Fabry v. Commissioner, supra at 308.

        Determining the intent of the payor is a factual inquiry,

and the terms of the agreement as well as the setting in which it

was reached and carried out are relevant in this endeavor.     See

Stocks v. Commissioner, supra at 11; Metzger v. Commissioner,

supra at 848-850; Sherman v. Commissioner, T.C. Memo. 1999-202;

Brennan v. Commissioner, supra.     Here, both indicate that PSC did

not pay $58,845 to petitioner on account of personal injuries and

in settlement of her purported tort claim.

     As regards the agreement itself, the waiver and release

document signed by petitioner explicitly covers “any and all

claims”.     It then sets forth a nonexclusive enumeration of claims

within its reach which includes both tort and nontort causes of

action.     The terms of the release thus indicate that the intent

of PSC was to settle all possible claims, not exclusively to

compensate petitioner for emotional distress.    The fact that the

document is a standard, general release with no specific mention

of petitioner’s individual harms is also supportive of such a

view.

     Furthermore, as noted by respondent, the release expressly

waives only claims “arising out of the termination” of

employment, thereby providing some basis for an argument that PSC
                               - 14 -

did not intend to settle claims arising out of the course of

employment, such as emotional distress experienced while working.

However, since petitioner’s termination can potentially be viewed

as a culmination or outgrowth of the purported discrimination and

consequent negative performance reviews, we decline to base our

resolution of this matter on a restrictive interpretation of the

above-quoted phrase.

     The designation of the program under which the release was

signed as the “Enhanced Severance Plan” is likewise indicative of

intent.    The inference from this choice of terminology is that

PSC management viewed as severance pay that which was received by

petitioner in exchange for signing the waiver.      Severance pay, in

turn, has been defined by this Court as “an allowance usually

based on length of service that is payable to an employee on

termination of employment.”    Webb v. Commissioner, T.C. Memo.

1996-50.    The fact that petitioner’s payment was calculated using

a formula of 2-1/2 weeks of pay per year of service is thus

consistent with and further evidences an intent to remit

severance pay, rather than to compensate for personal injuries.

     With respect to setting, the surrounding circumstances in

this case also tend to weigh against characterizing petitioner’s

payment as compensation for personal injuries and in favor of

seeing the funds as severance pay.      The parties engaged in no

meetings or negotiations concerning petitioner’s participation in
                               - 15 -

the Enhanced Severance Plan.   Petitioner was likewise afforded no

individualized treatment in terms of either the agreement signed

or the payment received.   Other employees who chose to

participate in the Enhanced Severance Plan signed identical

releases and received payments computed under the same

mathematical formula.   Petitioner’s award reflects no increase in

amount that could reveal an intent to recompense injuries that

she alone suffered.   Furthermore, although petitioner argues that

her full payment was intended to settle her personal injury

claim, we find that the implications of such a position render it

insupportable.   We cannot conclude that PSC gave other terminated

employees severance pay but refused such a benefit to petitioner,

and that she succeeded in getting anything at all only because of

her harassment complaints.

     A final indicator of PSC’s intent in making the payment is

the company’s own characterization of the sum.   PSC reported as

Form W-2 income and withheld taxes from the $63,097 gross amount

paid to petitioner under the Enhanced Severance Plan.     PSC also

labeled the $63,097 figure as “SEV PAY” on the company’s December

17, 1994, Payroll and Deduction Register.

     Given these facts, we find petitioner’s situation analogous

to previous cases involving lump-sum payments offered upon

termination in return for signing a general release, and we

conclude that a like result denying exclusion treatment is
                               - 16 -

warranted.   See Sherman v. Commissioner, supra; Brennan v.

Commissioner, T.C. Memo. 1997-317.      Petitioner acknowledges on

brief that “this Court has several times held that payments

received under mass termination programs are not excluded under

sections [sic] 104(a)(2).”   She maintains, however, that her

circumstances are distinguishable.

     Petitioner correctly observes that in a number of the mass

termination and general release cases, the employee had never

asserted, and the employer was not aware of, any work-related

personal injury claims.   See, e.g., Gajda v. Commissioner, T.C.

Memo. 1997-345; Lubart v. Commissioner, T.C. Memo. 1997-343,

affd. 154 F.3d 539 (5th Cir. 1998); Sodoma v. Commissioner, T.C.

Memo. 1996-275, affd. without published opinion 139 F.3d 899 (5th

Cir. 1998); Webb v. Commissioner, supra.      She then avers that

PSC’s knowledge of her existing claim, through her previous

complaints, differentiates her situation and shows that PSC

intended the general release to settle such claim.     Case law,

however, is contrary to any argument that employer awareness is

sufficient to transmute a payment that otherwise bears all

trappings of severance pay into compensation for personal

injuries.

     Two recent decisions regarding payments received pursuant to

a downsizing by International Business Machines Corporation (IBM)

illustrate this point.    In Brennan v. Commissioner, supra, the
                               - 17 -

taxpayer signed a general release of “all claims” and received a

payment based on years of service and rate of pay.     IBM reported

the payment as Form W-2 income, but the taxpayer argued that the

sum should be excluded from income under section 104(a)(2).       See

id.   He contended that he had a bona fide claim for intentional

infliction of emotional distress caused by his travel schedule

and pressures at work.   See id.   He emphasized that prior to

executing the release he had both filed internal grievances

regarding his complaints and been hospitalized for a nervous

breakdown.   See id.   He then asserted that, in light of these

previous grievances, IBM accepted his participation in the

severance program in lieu of litigating his claims.     See id.

      We assumed in Brennan v. Commissioner, supra, that the

taxpayer had established an underlying tort type cause of action

but found the following facts to indicate that the lump-sum

payment was more akin to severance pay than to personal injury

compensation:   The terms of the release covered both contract and

tort liability; the release form was a standard document used by

IBM for all employees who participated in the program; and the

amount of the payment was calculated on the number of years of

service and the taxpayer’s salary.      Lastly, the Court noted that

because the taxpayer had not come forward with any evidence of a
                                - 18 -

specific amount allocable to personal injury tort damages, rather

than severance pay, the entire payment was presumed taxable.            See

id.

      In Sherman v. Commissioner, T.C. Memo. 1999-202, the

taxpayer initially refused to participate in IBM’s severance

program and threatened to enjoin the downsizing terminations on

the basis of age discrimination.    He had also previously filed

unfair labor practice charges and internal complaints against

supervisors.   See id.   He alleged that his treatment by IBM had

resulted in physical and mental injury.      See id.    Through

negotiations, he and IBM reached a settlement which involved a

payment in excess of what would have been received under the

severance program and a general release of “all claims”.          Id.

A nonexclusive, “including but not limited to”, enumeration

followed “all claims” and reflected, among other things, the

particular complaints made by the taxpayer.       Id.

      Faced with the above-described facts, the Court, while

acknowledging that “It is apparent to us that IBM viewed

petitioner as litigious”, nonetheless concluded “IBM did not

intend for any portion of the $207,000 to be specifically carved

out as a settlement of a tort or tort type claim on account of a

personal injury or sickness.”    Id.     In reaching this conclusion,

the Court again gave primary emphasis to the all-encompassing

nature of the release:
                              - 19 -

     The agreement’s broad language indicates that IBM
     considered the $207,000 payment as a quid pro quo for
     petitioner’s release of all potential claims against
     IBM, including, but not limited to, tort claims. IBM
     did not make an identifiable portion of the payment in
     settlement of petitioner’s personal injury claim. The
     payment was for severance pay as well as for
     petitioner’s release of potential tort and nontort
     claims against IBM. [Id.]

As in Brennan v. Commissioner, supra, the Court held the entire

payment taxable because no basis for allocating some portion

solely to personal injury damages was proven by the taxpayer or

reflected by the record.   See id.

     Given these authorities and the evidence before us, we see

no grounds upon which to distinguish petitioner’s circumstances.

As explained above, we cannot accept petitioner’s argument that

the full amount of her payment was intended to compensate for

personal injuries, and we are satisfied that it is in the main

properly characterized as taxable severance pay.   Therefore,

since the record is devoid of any information that would support

allocation of a specific sum to personal injury damages, the

entire payment is taxable.   See Pipitone v. United States, 180

F.3d 859, 865 (7th Cir. 1999); Taggi v. United States, 35 F.3d

93, 96 (2d Cir. 1994); Sherman v. Commissioner, supra; Brennan v.

Commissioner, supra.
                             - 20 -

     We hold that the $58,845 received by petitioner is not

excluded from income under section 104(a)(2), and petitioner is

liable for taxes thereon.

     To reflect the foregoing,



                                        Decision will be entered

                                   under Rule 155.
