                  T.C. Summary Opinion 2006-78



                    UNITED STATES TAX COURT



                   CHARLES LEONARD BRADEN AND
              JOICE STIEBER BRADEN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6736-05S.            Filed May 11, 2006.



     Charles Leonard Braden and Joice Steiber Braden,

pro se.

     Stephen P. Baker, for respondent.



     WHALEN, Judge:    This case was filed pursuant to

section 7463 of the Internal Revenue Code as in effect

when the petition was filed.    Unless otherwise indicated,

subsequent section references are to the Internal Revenue

Code in effect for the year in issue.    The decision to be
                             - 2 -

entered is not reviewable by any other court, and this

opinion should not be cited as authority.

     Respondent determined a deficiency of $6,268 in

petitioners’ income tax for taxable year 2002.    The case

is before the Court at this time to decide a motion for

summary judgment filed by respondent.    Petitioners resided

in Emery, South Dakota, at the time they filed their

petition.

      The principal adjustment in the notice of deficiency

is an increase of $30,199 in petitioners’ gross income.

According to the notice, this adjustment is based on

a Form 1099-Misc, Miscellaneous Income, issued by the

Campbell v. State Farm Settlement Fund showing that

$30,199 had been paid to Joice Stieber Braden (petitioner)

as “other income” during 2002.

     As a consequence of the above adjustment, respondent

determined a decrease in the medical deductions claimed

on Schedule A, Itemized Deductions, of petitioners’ return

for taxable year   2002.   Respondent also determined that

petitioners had substantially understated their income tax

for 2002 within the meaning of section 6662(d) and that

petitioners are liable for an accuracy-related penalty of

$1,254 under section 6662(a).
                            - 3 -

     Respondent’s motion for summary judgment concedes that

there was reasonable cause for the understatement of tax

required to be shown on petitioners’ 2002 return and that

petitioners acted in good faith.    Accordingly, respondent

concedes, pursuant to section 6664(c), that petitioners are

not liable for the accuracy-related penalty of $1,254.     In

light of that concession, respondent’s motion is deemed to

be a motion for partial summary judgment.

     The petition asserts that $30,000 of the amount

received from the Campbell v. State Farm Settlement Fund

“was for personal injury” and is not includable in gross

income.   The petition refers to the fact that this amount

was received in connection with the settlement of Campbell

v. State Farm Mut. Auto. Ins. Co., CIV 99-505-TUC, D. Ariz.

(hereafter referred to as Campbell v. State Farm) a

lawsuit that expressly required participants to have

“sustained [personal] injury”.   The petition asserts that

the remainder, $199, “was for interest”.    The petition

states that petitioners had “sent $32.86 to the IRS as

payment for the additional taxes for $199.”

     According to respondent, the record “clearly shows

that Campbell v. State Farm was not a personal injury suit,

but was solely a complaint for compensatory damages, plus

interest and fees, directly and proximately arising from
                             - 4 -

State Farm’s breach of contract.”    Respondent argues:

“payments made in settlement of breach of contract suits

are specifically excluded from the definition of damages

which might qualify for exclusion under the provisions of

I.R.C. sec. 104(a)(2).”    Thus, according to respondent,

“none of the payments made in settlement of Campbell v.

State Farm are [sic] excludable from gross income under

section 104(a)(2).”

       Respondent’s motion for summary judgment explains

that

       Campbell v. State Farm was a class action lawsuit
       in which it was alleged that State Farm breached
       its insurance contracts with policyholders by
       failing to pay Uninsured Motorist/Underinsured
       Motorist (UM/UIM) benefits under more than one
       insurance policy purchased from State Farm on
       different vehicles owned by the individuals
       involved, in a practice referred to as “policy
       stacking.”


We note that the complaint filed in Campbell v. State Farm

had asserted that “Defendant State Farm’s refusal to allow

Plaintiff to ‘stack’ multiple uninsured and/or underinsured

motorist coverages provided by State Farm policies

constitutes a breach of contract.”

       Respondent’s motion does not rely on the settlement

agreement that was entered into by the parties to Campbell

v. State Farm.    Respondent’s motion refers to a document

entitled “Notice of Class Action, Proposed Settlement,
                            - 5 -

Opt Out Period, Fairness Hearing and Release” (hereinafter

notice of class action) that was filed in Campbell v. State

Farm before the settlement was approved by the court.     That

document makes the following reference to the settlement

agreement:


     The Settlement Agreement on file with the Court
     describes in more detail the claims that class
     members who remain in the class will give up if
     this Court approves the settlement. If you would
     like a copy of the Settlement Agreement, please
     contact Class Counsel.


The settlement agreement is not included in the record of

this case at this time.

     The notice of class action states that, as a condition

of the settlement of Campbell v. State Farm, State Farm had

deposited $11,250,000 into trust to be used to pay members

of the class.   It also states that each class member was to

receive an equal share of the fund, not to exceed $30,000

per class member, plus interest.    According to the notice

of class action, a class member was required to submit a

proof of claim questionnaire and certain other materials in

order to be eligible to receive a payment.    The record does

not contain the proof of claim questionnaire petitioner

submitted.

     Petitioners filed an objection to respondent’s motion

on January 6, 2006, and a supplement to their objection on
                            - 6 -

February 7, 2006.   We learn from those papers, and the

documents attached thereto, that petitioner was injured in

an automobile accident on November 11, 1983.    The driver

of the other car fled from the scene of the accident.      By

letter dated August 22, 1985, petitioner’s attorney made

demand on State Farm for $75,000 to settle petitioner’s

claim for continuing medical expenses.   In response, State

Farm paid to petitioner $15,000, the policy limit under one

of petitioner’s two automobile insurance policies, but it

refused to pay anything under a second policy.    Apparently,

that payment of $15,000 was made sometime between July 24,

1982, and July 20, 1988, and is not a part of the $30,000

which is at issue in the instant case.

     Subsequently, petitioner became a party to the class

action suit captioned Campbell v. State Farm.    As described

above, that suit challenged the refusal of State Farm to

allow customers to “stack” multiple uninsured and/or

underinsured motorist coverages provided under State Farm

policies.   According to the notice of class action, the

class of persons covered by the lawsuit is defined as

follows:


     a. Each person (and each person who has a claim
     for the wrongful death of a person) who was
     insured under multiple automobile liability
     insurance policies that: (1) were purchased by
     one insured on difference vehicles; (2) included
                           - 7 -

     UM and/or UIM coverage; (3) were delivered or
     issued for delivery in the State of Arizona by
     State Farm with respect to a motor vehicle
     registered or principally garaged in Arizona;
     and (4) were issued or renewed after July 24,
     1982, the effective date of the 1982 amendments
     to A.R.S. sec. 20-259.01;

     b. Who sustained injury (including fatal
     injuries) as a result of the fault of an
     uninsured or underinsured motorist while
     occupying a motor vehicle that is an insured
     vehicle under one of the policies described in
     paragraph (a) above or a non-owned vehicle that
     is described on the declarations page of an
     insurance policy providing UM or UIM coverage;

     c. Whose date of loss occurred after the
     issuance or renewal of the policies described in
     paragraph (a); and

     d. Who was paid, at any time between the date
     of loss described in paragraph (c) above and
     July 20, 1988, the UM or UIM limits on one
     automobile liability policy issued by State Farm
     but who did not receive payment from State Farm
     under any other UM or UIM coverage provided by
     another policy described in paragraph (a) above.


Thus, participation in the class action suit was expressly

limited to those:   (1) Who held multiple automobile

liability insurance policies issued by State Farm;

(2) who had “sustained injury (including fatal injuries)”

as a result of the fault of an uninsured or underinsured

motorist while occupying a motor vehicle that was insured

under one of the policies; and (3) who had been paid the

uninsured motorist/underinsured motorist limits on only

one of the State Farm policies.
                             - 8 -

     Campbell v. State Farm was settled by the parties

to that suit in late 2001.    The settlement agreement was

approved by the District Court in an amended final

judgment entered on November 27, 2001.    Petitioner

received her share of the settlement proceeds, $30,199,

in 2002.   The record of this case does not contain the

release that, we assume, petitioner executed in return

for the payment.

     The underlying issue is whether petitioners’ gross

income for taxable year 2002 should be increased by

$30,199, the amount determined in the notice of

deficiency.   As noted above, petitioners acknowledge in

their petition that they had received $199 of that amount

as “interest”, and they state that they had “sent $32.86

to the IRS as payment for the additional taxes for $199.”

Thus, petitioners concede in their petition that their

gross income for 2002 should be increased by $199 of

the amount determined in the notice of deficiency.

Respondent’s motion for summary judgment will be granted

as to that amount.

     As to the bulk of the increase in gross income

determined in the notice of deficiency, viz $30,000, the

issue raised in the petition is whether that amount

qualifies as damages received “on account of personal
                           - 9 -

physical injuries or physical sickness”, within the

meaning of section 104(a)(2).   As to this portion of the

adjustment, we find that respondent has failed to carry

his burden of showing that there are no material facts in

dispute and that he should prevail as a matter of law.

See, e.g., Sundstrand Corp. v. Commissioner, 98 T.C. 518,

520 (1992), affd. 17 F.3d 965 (7th Cir. 1994).    See also

Rule 121(a) and (b) of the Tax Court Rules of Practice and

Procedure.   Hereinafter, all Rule references are to the

Tax Court Rules of Practice and Procedure.    Accordingly,

we will deny respondent’s motion for summary judgment as

to the $30,000 amount that petitioners claim is excludable

from income pursuant to section 104(a)(2) as damages

received on account of personal injuries.    In deciding

respondent’s motion, we have viewed all factual inferences

in the light most favorable to petitioners.    See Speltz v.

Commissioner, 124 T.C. 165 (2005); Preece v. Commissioner,

95 T.C. 594, 597 (1990).

     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”.     Amounts are

excludable from gross income under section 104(a)(2) only
                            - 10 -

when (1) the underlying cause of action giving rise to the

recovery is based on tort or tortlike rights and (2) the

damages are received on account of personal injuries or

sickness.    See, e.g., O’Gilvie v. United States, 519 U.S.

79 (1996); Commissioner v. Schleier, 515 U.S. 323, 336-337

(1995); sec. 1.104-1(c), Income Tax Regs.

     The term “damages received”, as used in section

104(a)(2), is defined as 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.   If the damages are received

pursuant to a settlement agreement, as in this case, the

nature of the claim that was the basis for the settlement

controls whether damages are excludable under section

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

237(1992); Bagley v. Commissioner, 105 T.C. 396, 406

(1995), affd. 121 F.3d 393 (8th Cir. 1997).

     The determination of the nature of a claim is a

question of fact and is generally made by reference to

the settlement agreement in light of the surrounding

circumstances.   See, e.g., Robinson v. Commissioner, 102

T.C. 116, 126 (1994), affd. in part, revd. in part and

remanded on another issue 70 F.3d 34 (5th Cir. 1995);
                            - 11 -

Seay v. Commissioner, 58 T.C. 32, 37 (1972).    The ultimate

character of the payment hinges on the payor’s dominant

reason for making the payment.    See Fono v. Commissioner,

79 T.C. 680, 696 (1982), affd. without published opinion

749 F.2d 37 (9th Cir. 1984); Agar v. Commissioner, 290

F.2d 283, 284 (2d Cir. 1961), affg. per curiam T.C. Memo.

1960-21; Amos v. Commissioner, T.C. Memo. 2003-329.

     As stated above, respondent’s motion for summary

judgment asks the Court to hold that “none of the payments

made in settlement of Campbell v. State Farm are [sic]

excludable from gross income under section 104(a)(2).”

Respondent’s motion argues that this holding is required

because Campbell v. State Farm was an action for breach

of contract.    According to respondent, “payments made in

settlement of breach of contract suits are specifically

excluded from the definition of damages which might

qualify for exclusion under the provisions of I.R.C. sec.

104(a)(2).”    Thus, respondent asks the Court to hold that

the settlement proceeds at issue do not qualify for

exclusion under section 104(a)(2) solely because the

lawsuit which was settled, Campbell v. State Farm, was a

breach of contract suit.

     We disagree.    The type of lawsuit, by itself, does

not determine whether a payment in settlement of the
                            - 12 -

lawsuit qualifies, or does not qualify, as “damages

received * * * on account of personal injuries” under

section 104(a)(2).   Rather, it is the nature of the

taxpayer’s claim underlying the settlement payment that

controls.    United States v. Burke, supra at 237.   In order

to come within section 104(a)(2), the taxpayer must show

that the legal basis for the recovery   redresses a tort or

tortlike personal injury.   The fact that the lawsuit is

for breach of contract, by itself, does not foreclose the

possibility that the taxpayer’s claim is for personal

injury.

     To characterize the proceeds of litigation, the test,

simply stated, is:   “In lieu of what were the damages

awarded?”    Tribune Publg. Co. v. United States, 836 F.2d

1176, 1178 (9th Cir. 1988); Raytheon Prod. Corp. v.

Commissioner, 144 F.2d 110, 113 (1st Cir. 1944), affg. 1

T.C. 952 (1943).   In Raytheon Prod. Corp. v. Commissioner,

supra at 113, the court held that “The test is not whether

the action was one in tort or contract but rather the

question to be asked is ‘In lieu of what were the damages

awarded?’”   See also Milenbach v. Commissioner, 318 F.3d

924, 931-34 (9th Cir. 2003) (whether a portion of the

proceeds from settlement of eminent domain action should

be characterized as taxable lost profits), affg. in part,
                             - 13 -

revg. in part and remanding 106 T.C. 184 (1996); Getty

v. Commissioner, 913 F.2d 1486, 1490 (9th Cir. 1990)

(whether proceeds of a settlement should be characterized

as a gift or taxable income), revg. 91 T.C. 160 (1988).

     After submitting the motion for summary judgment,

respondent requested and was granted leave to file a

memorandum of points and authorities in support of

respondent’s motion for summary judgment (herein referred

to as memorandum).     In the memorandum, respondent makes

three arguments in further support of his position that

none of the payments petitioner received in settlement of

Campbell v. State Farm is excludable from gross income

under section 104(a)(2).

     The first argument in respondent’s memorandum is that

petitioner’s tort and contract claims actually were time

barred under the applicable statutes of limitations in

Arizona before the complaint in Campbell v. State Farm was

filed.   Respondent points out that Campbell v. State Farm

“was not filed until October 8, 1999--approximately

sixteen years after the accident and fourteen years after

the alleged breach.”    According to respondent, this was

well after both the 2-year period of limitations

applicable to personal injury suits and the 6-year period

of limitations applicable to “any cause of action which
                           - 14 -

she may have had against her insurance provider, for

uninsured or under-insured motorist (UM/UIM) coverage”.

Thus, respondent argues, petitioner’s “personal injury

tort claims had long since expired by operation of law

prior to 1999 when the Campbell class action case was

filed.”   Respondent cites Greer v. United States, 207 F.3d

322, 327 (6th Cir. 2000), and Dickerson v. Commissioner,

T.C. Memo. 2001-53, for the proposition that a taxpayer’s

tort claim cannot be taken into account under section

104(a)(2) unless “the claim existed at the time of the

settlement”.   Since petitioner had no extant tort claim

when Campbell v. State Farm was filed, respondent argues,

no part of the settlement payment is excludable under

section 104(a)(2).

     Respondent’s argument does not answer the obvious

question why the payor, State Farm, gave $30,199 to

petitioner to settle contract and/or tort claims that were

time barred under the applicable statutes of limitations.

Respondent’s memorandum touches on this question when

it states:   “the fact that * * * [petitioner] received

partial payment from the insurer between the period

July 24, 1982 and July 20, 1988 somehow entitled her to

participate as   a class member in Campbell v. State Farm”.

(Emphasis supplied.)   This unanswered question goes to the
                           - 15 -

intent of the payor, which is the most important factor in

determining “in lieu of what was the settlement amount

paid.”   See, e.g., Bagley v. Commissioner, 105 T.C. at

406; Stocks v. Commissioner, 98 T.C. 1, 10-11 (1992).

     Neither respondent’s memorandum nor the record in

this case answers this question or permits the Court, in

the context of deciding respondent’s motion for summary

judgment which requires the Court to draw all factual

inferences in petitioners’ favor, to find that State Farm

did not intend the settlement payment to satisfy

petitioner’s tort claims, at least in part.   Even if, as

argued by respondent, prosecution of the claims was barred

by the statutes of limitations in Arizona, we believe

that the claims were nevertheless extant.   Clearly,

petitioner’s claims are unlike the “Claims for potential

future personal injuries” which the court in the case

cited by respondent, Greer v. United States, supra at

327 said “are insufficient.”   Moreover, the nature of

petitioner’s claims, and not the validity of the claims,

controls whether a payment in settlement thereof is

excludable under section 104(a)(2).   See, e.g., Robinson

v. Commissioner, 102 T.C. at 126; Stocks v. Commissioner,

supra at 10.
                             - 16 -

     The second argument in respondent’s memorandum is

that there is no allegation in the complaint filed in

Campbell v. State Farm of any physical injuries as a

result of the insurer’s breach of contract and, thus, no

allegation of “a direct link between personal injuries

and the recovery of damages, as required by Schleier

v. Commissioner [sic], 515 U.S. 323 (1995)”.     As discussed

above, however, the complaint expressly limits membership

in the class of plaintiffs to persons who had sustained

injury through the fault of an uninsured and/or

underinsured motorist, and who had not been paid the

uninsured and/or underinsured motorist coverage limits

under one or more automobile liability insurance policies

issued by State Farm.     In this situation, it would seem

that the measure of damages of each class member in

Campbell v. State Farm would take into account his or

her unpaid tort claims.    In any event, we cannot fully

evaluate the allegations of the complaint filed in

Campbell v. State Farm and the settlement of that case

without reviewing the settlement agreement and other

documents from the case, such as the proof of claim

questionnaire and the release petitioner submitted.

     The third argument in respondent’s memorandum is that

there is no allocation of the settlement payment to tort
                             - 17 -

claims and the only reference in the record to specific

claims is found in the section of the notice of class

action entitled “Release”.    That section states, in part,

as follows:


     If the Court approves the proposed settlement,
     and if you are a class member who did not timely
     and properly request exclusion from the class,
     you will release (give up) all claims against
     State Farm, its parents, predecessors, and
     subsidiaries that have been or could have been
     asserted in this lawsuit, and all claims known
     or unknown arising from the allegations of the
     complaint as described in the Settlement
     Agreement on file with the Court.


As mentioned above, the settlement agreement is not in the

record of this case.   Nevertheless, respondent argues that

the above language “cannot, as a matter of law, include

the petitioner’s statute-barred tort claims from 1983.”

We also note that the release that petitioner may have

signed is not in the record of this case.

     Furthermore, respondent argues, “the absence of any

settlement allocation between specific claims, would still

render the entire damage award taxable.”    In support of

that argument, respondent cites Taggi v. United States,

835 F. Supp. 744, 746 (S.D. N.Y. 1993), affd. 35 F.3d 93

(2d Cir. 1994), and Morabito v. Commissioner, T.C. Memo.

1997-315.   In both cases, the taxpayer had accepted a

payment in connection with the termination of his
                            - 18 -

employment and had executed a comprehensive, general

release of all claims against the employer.      See Morabito

v. Commissioner, supra; Taggi v. United States, supra at

745.   In each case, the court rejected the taxpayer’s

attempt to exclude all or a portion of the payment from

income under section 104(a)(2).      Neither taxpayer had made

a claim against the employer before accepting the payment,

and both courts held that, accordingly, there was no

settlement of a specific claim but merely a waiver of

general rights.   See Morabito v. Commissioner, supra;

Taggi v. United States, supra at 746.      Both courts further

held that the lack of any allocation of the payment to

damages excludable under section 104(a)(2) required the

entire amount to be included in income.      See Morabito v.

Commissioner, supra; Taggi v. United States, supra at 746.

In Morabito we stated the legal principle as follows:


       Where a settlement agreement contains a number
       of claims, does not allocate the portion
       excludable under section 104(a)(2), and there
       is no other evidence that a specific claim was
       meant to be singled out, the court must consider
       the entire amount taxable. * * *


       The instant case is much different.    Petitioner had

made a formal claim against State Farm for damages

incurred in an automobile accident, and State Farm paid

an amount limited to the motorist/underinsured motorist
                           - 19 -

limits under one of petitioner’s two State Farm policies.

Subsequently, petitioner joined Campbell v. State Farm,

a lawsuit of like individuals who sought to challenge

the refusal of State Farm to allow “stacking” of

insurance policies.   In effect, petitioner sought to

obtain additional payment for the damages incurred in

her automobile accident equal to the uninsured motorist/

underinsured motorist coverage under her second State

Farm policy.

     Respondent’s arguments fail to show that the payor,

State Farm, did not intend any part of the $30,000

settlement payment as damages for the personal injuries

petitioner suffered in connection with her automobile

accident.   First, the record does not include the

settlement agreement entered into by the parties to

Campbell v. State Farm.   We can make no definitive finding

about the intent underlying State Farm’s settlement

payments to petitioner and the other participants in the

class action suit Campbell v. State Farm without that

document.   Second, each member of Campbell v. State

Farm had an unpaid tort claim against State Farm.    By

definition, class membership in Campbell v. State Farm was

specifically limited to persons, like petitioner, who

were insured under multiple State Farm policies and who
                           - 20 -

had sustained uncompensated personal injuries in a motor

vehicle accident with an uninsured or underinsured

motorist.   Furthermore, each class member was required to

submit a proof of claim package as to those facts in order

to participate in the settlement.    It is reasonable to

infer that State Farm intended the settlement to satisfy

those tort claims.   Respondent has not shown otherwise.

     After considering respondent’s motion for summary

judgment and respondent’s memorandum, we are unable to

find that no part of the $30,000 paid by State Farm and

received by petitioner in settlement of Campbell v. State

Farm was attributable to the personal injuries petitioner

suffered in connection with her automobile accident.

Accordingly, as mentioned above, we will deny respondent’s

motion for summary judgment as to the $30,000 on the

ground that, as to that amount, respondent has failed to

carry his burden of showing that there are no material

facts in dispute and that he should prevail as a matter

of law.   See Rule 121(a) and (b).
                     - 21 -

On the basis of the foregoing,


                          An appropriate order

                     granting respondent's motion

                     for summary judgment in part

                     and denying respondent's motion

                     for summary judgment in part

                     will be issued.
