                  T.C. Memo. 1997-426



                UNITED STATES TAX COURT


            D. SAM SCHEELE, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 11469-95.         Filed September 22, 1997.



     R determined a deficiency in tax and a penalty
because P omitted from gross income an amount received
pursuant to a series of agreements relating to a
partnership that had prevailed in a lawsuit and in
which P was a partner. P claimed that he received the
payment in consideration for giving up his claim for
damages on account of personal injuries.
     1. Held: P has failed to prove that the payment
was in settlement of a claim for damages on account of
personal injuries.
     2. Held, further, P is liable for the penalty
under sec. 6662(a).



Wesley W. Kirtley, for petitioner.

Catherine J. Caballero, for respondent.
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                        MEMORANDUM OPINION

     HALPERN, Judge:   Respondent determined a deficiency in

petitioner's Federal income tax for his 1989 taxable year of

$67,883 and a penalty under section 6662(a) of $13,577.   The

issues we must decide are (1) whether petitioner may exclude an

amount from gross income as damages received on account of

personal injuries and (2) whether petitioner is liable for the

penalty.

     Unless otherwise noted, 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.

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

The stipulation of facts filed by the parties, with accompanying

exhibits, is incorporated herein by this reference.    We need find

few facts in addition to those stipulated; accordingly, we shall

not separately set forth those findings and shall include our

additional findings of fact in the discussion that follows.

Petitioner bears the burden of proof.   Rule 142(a).

                         Background

Introduction

     Petitioner resided in Grants Pass, Oregon, at the time the

petition was filed.
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     In November and December 1989, petitioner received from one

Lee Weisel (Weisel) payments totaling $279,219 (the Weisel

payment).   Petitioner did not include the Weisel payment as an

item of gross income in his 1989 Federal income tax return.

Petitioner’s omission of the Weisel payment from gross income is

the principal basis for respondent’s determination of a

deficiency.   To understand petitioner’s reason for not reporting

the Weisel payment as an item of gross income, it is necessary to

understand something of petitioner’s business dealings during the

years prior to the payment.

Biomass One L.P.

     Biomass One L.P. (Biomass) is a Delaware limited partnership

formed in 1984 to own and operate a woodwaste-fired, thermal

electric power and steam generating facility, which was to be

constructed in White City, Oregon (the cogeneration facility).

     Biomass Operating Co., Inc. (Biomass Operating), is an

Oregon corporation.    Petitioner and Weisel are two of three

shareholders of Biomass Operating.      At various times between

December 31, 1984, and January 12, 1989, petitioner, Weisel, and

Biomass Operating were, alone or together, managing general

partners of Biomass.

     Sometime in March 1984, Biomass entered into a contract for

the design and construction of the cogeneration facility (the
                               - 4 -

construction contract) with four of its limited partners (the

participating limited partners) and with a contractor

(S-P Construction) and an architect/engineer (collectively, the

S-P parties).   The participating limited partners had various

ownership interests in S-P Construction and the architect/

engineer.

Biomass Lawsuit

     In 1987, Biomass and Biomass Operating sued the S-P parties

for compensatory and punitive damages relating to their

performance of the construction contract (the Biomass lawsuit).

The original complaint (the first complaint) alleges breach of

contract and negligence and includes claims for damages due to

loss of reputation and goodwill.   In March 1988, Biomass and

Biomass Operating filed a third amended complaint in the Biomass

lawsuit (the third amended complaint).   The third amended

complaint adds Aetna Ins. Co. (Aetna) as a defendant and includes

more detailed allegations relating to the S-P parties'

performance under the construction contract, but makes no claims

for damages due to loss of reputation or goodwill.

     In 1989, the Biomass lawsuit was resolved by agreement (the

settlement agreement).   The settlement agreement requires

S-P Construction to pay Biomass funds from its insurers totaling

approximately $9,200,000.   The settlement agreement includes a
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general release of all claims and counterclaims relating to the

construction contract.   Petitioner signed the settlement

agreement, as did the other current and former managing general

partners in Biomass.

     A trust account (the trust account) was established by the

law firm of Irell and Manella, attorneys for Biomass, to hold and

disburse the funds received pursuant to the settlement agreement

(the settlement proceeds).



Option Agreement

     Previously, on December 31, 1987, petitioner, Weisel, and

certain limited partners of Biomass, including Laurence A.,

Preston R., Daniel R. and Thomas J. Tisch, and Project Capital

1985, a New York general partnership (collectively, the Tisch

group), had entered into an option agreement (the option

agreement).

      At the time the option agreement was executed, petitioner

and Weisel had equal interests in Biomass (a 3.3-percent interest

that would become a 14.561-percent interest after the 60th month

of commercial operation of the cogeneration facility).   Under the

option agreement, the Tisch group had the option to purchase part

of Weisel’s and petitioner’s interests in Biomass.   The amount to
                              - 6 -

be paid to petitioner and Weisel upon exercise of the option was

$1 million each.

     Part of the consideration received by petitioner and Weisel

for entering into the option agreement was the promise by the

Tisch group to fund the Biomass lawsuit upon agreement being

reached among the Tisch group, petitioner, and Weisel as to the

strategy and approach to be followed in that litigation.     Among

the conditions precedent to the Tisch group’s exercise of its

option under the option agreement was that Weisel be given the

opportunity to enter into an agreement with Biomass providing

Weisel the right to receive 7.5 percent of the gross recovery

from the Biomass lawsuit.

     The option agreement also provided that, once the Tisch

group exercised its option, petitioner would resign as managing

general partner of Biomass and Weisel would resign as both a

managing general partner and a general partner of Biomass.

     The Tisch group exercised its rights under the option

agreement with respect to both petitioner and Weisel.   After that

exercise, in accordance with the option agreement, petitioner

retained a 2.2-percent interest in Biomass that would become a

12.262-percent interest in Biomass after the 60th month of

commercial operation of the cogeneration facility, and Weisel
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retained a 2.2-percent interest that would remain a 2.2-percent

interest.

Weisel Resignation Agreement

     On October 14, 1988, as required by the option agreement,

Weisel and Biomass entered into an agreement (the Weisel

resignation agreement).   Among other things, the Weisel

resignation agreement grants Weisel 7.5 percent of the gross

recovery from the Biomass lawsuit.

Weisel-Petitioner Sharing Agreement

     Also on October 14, 1988, Weisel and petitioner entered into

an agreement (the Weisel-petitioner sharing agreement) whereby

they agreed to share their interests in Biomass equally,

including, among other things, Weisel's 7.5-percent interest in

the gross recovery from the Biomass lawsuit.    Petitioner and

Weisel had agreed prior to entering into the option agreement

that they would not enter into the option agreement unless they

shared everything they received from Biomass.

Settlement Proceeds

     After the settlement of the Biomass lawsuit, by a letter

dated November 14, 1989, Marc D. Rappaport, the then managing

general partner of Biomass authorized Irell and Manella to pay

Weisel 7.5 percent of the settlement proceeds then held in the

trust account.   Pursuant to that authorization, payments from the
                                 - 8 -

trust account in the total amount of $558,438 were made to Weisel

in November and December 1989.

Payment to Petitioner

      In November and December 1989, pursuant to the Weisel-

petitioner sharing agreement, petitioner received from Weisel

payments totaling $279,219 (viz, the Weisel payment).

                            Discussion

I.   Deficiency

      A.   Introduction

      We must determine whether the Weisel payment is excludable

from gross income pursuant to section 104(a)(2).   In pertinent

part, section 104(a)(2) provides:    “gross income does not include

* * * the amount of any damages received (whether by suit or

agreement * * * ) on account of personal injuries or sickness”.

Petitioner argues that the Weisel payment is a recovery for

damage to his professional reputation as a result of the problems

arising out of the construction and performance of the

cogeneration facility and, thus, is excludable under section

104(a)(2) as damages received on account of personal injuries.

Petitioner claims that the Weisel payment was made in liquidation

of claims asserted in the first complaint against the S-P parties

in the Biomass lawsuit.   Respondent argues that the settlement

agreement did not settle any claims of personal injury and that
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the Weisel payment was received in consideration for petitioner's

transfer to Weisel of part of petitioner’s substantially larger

interest in Biomass.    Petitioner bears the burden of proof,

Rule 142(a), and has failed to prove that the Weisel payment

constitutes an amount of damages received on account of personal

injuries.

     B.   Biomass Lawsuit

     Section 1.104-1(c), Income Tax Regs., interprets section

104(a)(2) as follows:

     Section 104(a)(2) excludes from gross income the amount
     of any damages received (whether by suit or agreement)
     on account of personal injuries or sickness. The term
     “damages received (whether by suit or agreement)” means
     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.

     The settlement proceeds do not constitute damages received

on account of personal injuries (to petitioner) within the

meaning of section 104(a)(2).    The third amended complaint, which

was the basis for the settlement agreement, makes no claims for

damages due to personal injuries to petitioner.    The settlement

agreement makes no allocation to claims for such damages, and

petitioner has failed to show that the S-P parties intended to

settle any claims for personal injuries to petitioner.    See

Stocks v. Commissioner, 98 T.C. 1, 10 (1992) ("the most important

factor in determining any exclusion under section 104(a)(2) is
                              - 10 -

‘the intent of the payor’ as to the purpose in making the

payment") (citing Knuckles v. Commissioner, 349 F.2d 610, 612

(10th Cir. 1965), affg. T.C. Memo. 1964-33);     Metzger v.

Commissioner, 88 T.C. 834, 847-848 (1987), affd. without

published opinion 845 F.2d 1013 (3d Cir. 1988).    Nor do we infer

from the general release included in the settlement agreement

that any portion of the settlement proceeds constitutes payment

for personal injury claims not specified in that agreement.   See

Galligan v. Commissioner, T.C. Memo. 1993-605.

     C.   Bargained For Consideration

     Petitioner argues alternatively that, even if the settlement

proceeds per se do not constitute damages on account of personal

injuries, he received a share of those proceeds by way of the

option agreement, the Weisel resignation agreement, and the

Weisel-petitioner sharing agreement (collectively, the pertinent

agreements) in consideration for his “willingly let[ting] the

claims for damages to reputation and good will be eliminated in

the third amended complaint so the settlement could be directed

toward receipt of insurance proceeds.”

     Petitioner has failed to convince us, however, that he

received the Weisel payment in consideration for giving up

(settling) any claims for damages on account of personal

injuries.   None of the pertinent agreements mentions the
                               - 11 -

elimination of any personal injury claims in the Biomass lawsuit

(or otherwise) as being in consideration for the benefits to be

received by petitioner (or Weisel).     The option agreement

provides for agreement to be reached as to strategy and approach

to the Biomass lawsuit, but that provision is insufficient to

convince us that any of the 7.5-percent payment to Weisel was in

consideration for petitioner's giving up any claims.     Weisel gave

up a greater portion of his partnership interest than did

petitioner and may have received the 7.5-percent payment in

consideration therefor.   Even if we grant that, because of the

Weisel-petitioner sharing agreement, petitioner had a one-half

interest in the 7.5-percent payment, petitioner has failed to

convince us that the 7.5-percent payment was received in

consideration for anything other than the partnership interests

and other items of consideration set forth in the option

agreement.    We take the pertinent agreements at face value and

accord little weight to petitioner's uncorroborated and self-

serving testimony.   See Tokarski v. Commissioner, 87 T.C. 74, 77

(1986).   In addition, we draw a negative inference from

petitioner's failure to present the testimony of any other party

to the transactions.    Wichita Terminal Elevator Co. v.

Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th

Cir. 1947).    In sum, petitioner has failed to convince us that
                                - 12 -

the 7.5-percent payment to Weisel (or the Weisel payment to

petitioner) was in consideration for any settlement by petitioner

of a claim for damages on account of personal injuries.



II.   Section 6662 Penalty

      Section 6662(a) imposes a penalty in the amount of

20 percent of any portion of an underpayment of tax required to

be shown on a return that is attributable to one or more factors

listed in section 6662(b).   Those factors include negligence or

disregard of rules or regulations and any substantial

understatement of income tax.    The term “negligence” includes

“any failure to make a reasonable attempt to comply with the

provisions” of the Code, and the term “disregard” includes “any

careless, reckless, or intentional disregard.”    Sec. 6662(c).

Section 6662(d)(1)(A) provides that there is a substantial

understatement of income tax if the amount of the understatement

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

on the return for the taxable year or $5,000.    Petitioner has the

burden of proving that respondent’s determination under section

6662(a) is incorrect.   Rule 142(a).

      Petitioner has failed to submit any evidence or argument

with respect to respondent's determination that petitioner is

liable for the penalty pursuant to section 6662(a), except for
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his argument that the Weisel payment is excludable under section

104(a)(2).   Petitioner has failed to carry his burden of proof

and, thus, petitioner is liable for the penalty imposed by

section 6662(a).


                                         Decision will be entered

                                    for respondent.
