                           T.C. Memo. 1998-8



                      UNITED STATES TAX COURT



         WALTER R. and MARILYN K. EASTER, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9166-96.                       Filed January 7, 1998.



     Walter R. and Marilyn K. Easter, pro se.

     Allan D. Hill, for respondent.



                        MEMORANDUM OPINION

     RAUM, Judge:   The Commissioner determined a $33,193

deficiency in petitioners' 1992 Federal income taxes.     There are

two issues for consideration:    (1) Whether a settlement payment

of $135,000 and an incentive payment of $16,200 paid by State

Farm Insurance Company to petitioner Marilyn K. Easter to

encourage her to settle her sex discrimination claim in a class
                                - 2 -

action suit brought under Title VII of the Civil Rights Act of

1964, 42 U.S.C. sec. 2000e et seq., are excludable from

petitioners' gross income pursuant to section 104(a)(2)1, and (2)

whether petitioners are entitled to deduct $37,841 in legal fees,

relating to the State Farm settlement, as a trade or business

expense or as a miscellaneous itemized deduction.

     At the time of the filing of their petition, petitioners,

Walter R. and Marilyn K. Easter, resided in Pleasanton,

California.   Walter Easter is involved as a petitioner herein

solely because he filed a 1992 joint income tax return with his

wife Marilyn K. Easter.   References to petitioner in the singular

will be to Marilyn K. Easter.

     Petitioner, whose maiden name was Marilyn Brent, was

employed by State Farm Insurance Company from December 1, 1983,

through February 27, 1986.   She was a claimant in a class action

suit filed in the District Court for the Northern District of

California entitled Kraszewski v. State Farm Gen. Ins. Co., 38

Fair Empl. Prac. (BNA) Cas. 197 (N.D. Cal. 1985)(hereinafter "the

class action suit").   On May 11, 1988, petitioner filled out a

document entitled "INITIAL CLAIM FORM" that was used by the law

firm of Farnsworth, Saperstein & Seligman (hereinafter referred

to as the Saperstein firm) to evaluate her claim.   During April

     1
        Unless otherwise indicated, all section references are to
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.
                                 - 3 -

1989, the Saperstein firm provided petitioner with a document

entitled "Overview of Final Claimant Selection Process."    On

September 1, 1989, Mrs. Easter filed a final claim form with

State Farm.

     In January 1988, the Saperstein firm, representing the

plaintiffs, and State Farm entered into a Consent Decree

Regarding Monetary Relief, Instatement Relief, and Notice

(hereinafter referred to as the Consent Decree) in order to

facilitate resolution of the remaining claims.    The Consent

Decree limited damages available to class members to:    "(1) back

pay; (2) front pay; (3) prejudgment interest; (4) postjudgment

interest; and (5) reasonable attorneys [sic] fees and costs."

The Consent Decree also provides the manner in which the

available damages will be calculated.

     On January 17, 1992, District Court Judge Eugene Lynch sent

a document entitled "Communication of State Farm's Settlement

Offer" to all claimants, including Mrs. Easter, that had attached

various documents describing State Farm's settlement offer.

Included in the documents attached was the Master Settlement

Agreement dated January 17, 1992, entered into by the Saperstein

firm and State Farm's attorneys.

     On February 12, 1992, petitioner signed a Settlement

Agreement and General Release.    In exchange for $135,000 plus

additional payments of up to $18,000 (conditioned upon the

percentage of claimants who settled), petitioner agreed to
                                - 4 -

release State Farm from "any claim * * * of any and every kind

based on any federal, state, or local law

* * * as well as any and all claims * * * arising out of or

relating to any alleged discriminatory, improper, or unlawful act

or omission of State Farm."    The $135,000 settlement represented

51 percent of the full value of petitioner's $264,935 claim.    The

full value of the claim was calculated based on "back pay as a

State Farm agent accrued from the year of the challenged

appointment to February 1, 1992, plus six months of front pay

from that date forward."

     During the taxable year 1992, State Farm paid $135,000 in

settlement of Mrs. Easter's claim in the class action suit and an

incentive payment in the amount of $16,200, both in accordance

with the Master Settlement Agreement and the Settlement Agreement

and General Release.   Of the $151,200 total amount, $37,841.25

was retained by class counsel as legal fees, and the remainder

was received by Mrs. Easter.   On April 24, 1992, the Saperstein

firm sent Mrs. Easter its check for $112,778.29 that represented

her share of the settlement proceeds from her State Farm claim,

less $580.46 taxes withheld.

     Section 104(a)(2) allows a taxpayer to exclude from gross

income "the amount of any damages received (whether by suit or

agreement and whether as lump sum or periodic payments) on

account of personal injuries or sickness".   In United States v.

Burke, 504 U.S. 229 (1992), the taxpayers brought a sex
                                 - 5 -

discrimination claim under Title VII of the Civil Rights Act of

1964 against their employer.    The parties eventually reached a

settlement in which the employees would receive varying amounts

based on length of service and rate of pay.    The employer

withheld Federal income taxes on the amounts received by the

taxpayers.    Id. at 230-231.   The taxpayers sought refunds of the

withheld taxes on the ground that the settlement amounts were

excludable under section 104(a)(2) as "damages received * * * on

account of personal injuries or sickness."     Id. at 232.

       The Supreme Court held that the nature of the claim

underlying the taxpayers' settlement awards controlled the

excludability of the settlements under section 104(a)(2).     Id. at

237.    The Court noted that Title VII under the 1964 Civil Rights

Act limited "available remedies to backpay, injunctions, and

other equitable relief."    Id. at 238.   The Court further stated

that

       The remedy, correspondingly, consists of restoring victims,
       through backpay awards and injunctive relief, to the wage
       and employment positions they would have occupied absent the
       unlawful discrimination. * * * Nothing in this remedial
       scheme purports to recompense a Title VII plaintiff for any
       of the other traditional harms associated with personal
       injury, such as pain and suffering, emotional distress, harm
       to reputation, or other consequential damages * * *

Id. at 239.    Since the taxpayers could receive under Title VII

only wages, which they otherwise would have paid taxes upon in

the normal course, the Court held that Title VII did not redress

"a tort-like personal injury within the meaning of section
                                - 6 -

104(a)(2) and the applicable regulations."     Id. at 241.

Accordingly, the settlement amounts received by the taxpayers

were not excludable from gross income under section 104(a)(2).

Id. at 242.

     Like the taxpayers in Burke, petitioner brought a sex

discrimination claim under Title VII of the Civil Rights Act of

1964 against her employer.   As in Burke, petitioner eventually

settled her claim.    The Settlement Agreement and General Release

provides:

     The approximate full value of CLAIMANT's claim under the
     Consent Decree damage formula as of February 1, 1992, is
     $264,935.00, which represents back pay as a State Farm agent
     accrued from the year of the challenged appointment to
     February 1, 1992, plus six months of front pay from that
     date forward.

The settlement amount of $135,000 offered to petitioner

represented 51 percent of the estimated Consent Decree value of

her claim.    According to Burke, since the damages available to

petitioner as a Title VII claimant consisted of only wages, which

would otherwise be taxable, the settlement amount she received

does not constitute "damages received * * * on account of

personal injuries".    Id. at 242.   Thus, it is not excludable

under section 104(a)(2).2

     2
        In November 1991, the Civil Rights Act of 1991 became
law. Landgraf v. USI Films Prods., 511 U.S. 244, 249 (1994). In
addition to the traditional remedies of backpay and injunction,
the new act allows the plaintiff to recover compensatory and
punitive damages. It also gives the right to a jury trial. Id.
at 252-253. The Supreme Court held that those amendments did not
                                                   (continued...)
                                - 7 -

     Petitioners have not differentiated between the settlement

award and the incentive payment.   They contend that the entire

amount is excludable.   In Berst v. Commissioner, T.C. Memo. 1997-

137, we held that an incentive payment made to another claimant

in the same class action suit (Kraszewski v. State Farm Gen. Ins.

Co.) was received contingent upon the signing of the Release,

making the incentive amount bargained-for consideration.      There

is nothing that distinguishes the present case.      Thus, the

incentive payment is also includable in gross income.

     In the notice of deficiency, the Commissioner allowed

petitioners to deduct their legal fees as a miscellaneous

itemized deduction.   Petitioners have not contested this

treatment except to the extent that they have argued that the

entire award should be excluded from gross income pursuant to

section 104(a)(2).    Based on our holding above, we conclude that

petitioners must be treated as having conceded this issue.

     Due to a concession by respondent,

                                             Decision will be entered

                                        under Rule 155.




(...continued)
apply retroactively. Id. at 286. Thus, petitioner's Title VII
claim, and its potential exclusion under sec. 104(a)(2), must be
considered in light of the Act under which she sued. Clark v.
Commissioner, T.C. Memo. 1997-156. Since Burke also involved the
application of sec. 104(a)(2) to a settlement award under Title
VII of the 1964 Act, its result is squarely on point for this
case.
