                        T.C. Memo. 2002-115



                      UNITED STATES TAX COURT



                 DONNA J. COLLINS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

   SHAHRAM MANIGHALAM, Petitioner v. COMMISSIONER OF INTERNAL
                       REVENUE, Respondent



     Docket No. 8078-00, 8210-00.         Filed May 9, 2002.



     Gary R. King, for petitioner in docket No. 8078-00.

     Shahram Manighalam, pro se.

     Kevin W. Coy and Kelley Blaine, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   Respondent determined a deficiency in

petitioners’ 1994 Federal income tax of $12,665 and an addition

to tax under section 6651(a)(1) of $1,611.50.
                                - 2 -

     The Xircom company extended a job offer to Shahram

Manighalam (petitioner).    Petitioner then resigned from a

position with his prior employer, American Telephone & Telegraph

(AT&T).   However, Xircom rescinded its job offer before

petitioner began his employment at Xircom, and AT&T refused

petitioner’s request to rescind his resignation.    As

compensation, Xircom paid $59,163 to petitioner in 1994.      The

issues for decision are:1

     1.   Whether petitioners may exclude the Xircom payments for

1994 from gross income under section 104(a)(2) as damages for a

personal injury.   We hold that they may not.

     2.   Whether petitioners are liable for the addition to tax

for failure to timely file under section 6651(a)(1) for 1994.       We

hold that they are.

     3.   Whether the statute of limitations bars assessment of

tax for 1994.   We hold that it does not.

     Section references are to the Internal Revenue Code as

amended and in effect for the year in issue, and Rule references

are to the Tax Court Rules of Practice and Procedure.




     1
        Before trial, Donna J. Collins conceded all separate
issues raised in her petition and agreed to be bound by the
Court’s decision on all other issues in Shahram Manighalam’s
case.
                                - 3 -

                          FINDINGS OF FACT

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

A.   Petitioners

     Petitioners resided in Fullerton, California, when they

filed their petitions.    Their cases were later consolidated for

trial, briefing, and opinion.

     Petitioner has a bachelor’s and a master’s degree in

electrical engineering.   Petitioners were married in 1991.   Donna

J. Collins (Collins) did not work outside the home while she was

raising petitioners’ two young sons in 1994.

     Petitioner worked as an engineer for AT&T in Huntington

Beach, California, in 1994.    Early in 1994, a recruiting firm

contacted petitioner about working for Xircom, Inc. (Xircom), in

Thousand Oaks, California.

     James Richard Soriano III (Soriano) and several Xircom

engineers interviewed petitioner.    On March 24, 1994, Xircom

offered petitioner a job at a monthly salary of $6,666.67,

beginning April 18, 1994.    Xircom agreed to pay petitioners’

relocation expenses from Fullerton, where they lived at the time,

to Thousand Oaks.   Petitioner accepted the Xircom offer.

Petitioner resigned from AT&T on March 31, 1994.

     Xircom withdrew its offer to petitioner on April 11, 1994.

Petitioner unsuccessfully tried to withdraw his resignation from

AT&T.   He advised Xircom of this fact on April 14, 1994.
                               - 4 -

B.   Petitioner’s Negotiations With Xircom

     Before 1994, Xircom had occasionally offered jobs to

prospective employees (other than petitioner) and withdrawn those

offers before the employee began to work for Xircom.    In 1994,

Xircom’s practice was to offer to prospective employees from whom

it had withdrawn employment offers replacement salary,

replacement medical insurance payments, and out-placement

services.2

     On April 14, 1994, Xircom offered petitioner medical

insurance, out-placement services, and payments equal to 3 months

of his AT&T salary.   Xircom intended the payments to replace the

compensation that petitioner would have earned in 3 months at

AT&T if Xircom had not made a job offer to him.

     Petitioner made a counteroffer in which he asked for 9

months of the salary Xircom had promised him ($6,666.67 per

month) and a positive employment reference.   On April 19, 1994,

Xircom agreed.   Petitioner and Xircom signed a consulting

agreement effective as of April 18, 1994, which said that

petitioner was an independent contractor of Xircom.    Xircom

agreed to pay petitioner $6,666.67 per month until January 31,

1995, and it gave petitioner a positive employment reference.



     2
        Out-placement services include assistance in career
planning and development of skills in areas such as resume
preparation and interviewing.
                                - 5 -

     Petitioner performed no services for Xircom in 1994.    Xircom

paid petitioner $59,163 in 1994 and $6,666.66 in 1995 under the

consulting agreement.    Xircom issued to petitioner Forms 1099-

MISC, Miscellaneous Income, showing that it had paid him

nonemployee compensation in those amounts.

     The consulting agreement was scheduled to expire on January

31, 1995.   On January 16, 1995, petitioner wrote to Xircom and

asked Xircom to extend the period for which he was to be

compensated for another 9 months.    Xircom refused.

     Petitioner then offered to release Xircom from liability for

“any damages inflicted on me as a result of Xircom’s withdrawal

of job offer.”   On January 24, 1995, Xircom offered to extend the

original agreement for 2 months (until March 31, 1995) if

petitioner agreed to sign a settlement agreement and mutual

release of all claims.    Petitioner refused.   On January 25, 1995,

petitioner threatened to sue Xircom if it did not agree to pay

him a lump-sum payment of $51,115.12 (7 months of compensation

($6,666.66) plus 7 months of COBRA coverage ($635.50)).

Petitioner asked Xircom to characterize all of its payments to

him as a “personal injury settlement (for tax purposes)”.    Xircom

refused to do so.

C.   Petitioner’s Lawsuit

     On March 15, 1995, petitioner sued Xircom in the Superior

Court of Orange County, California.     Petitioner sought $4 million
                                 - 6 -

in damages for loss of earnings.    He alleged three causes of

action:   Breach of contract, intentional tort for fraudulent

inducement to enter into a contract, and general negligence.     The

court granted Xircom’s motion for judgment on the pleadings as to

the intentional tort and negligence claims.    The court found no

breach of contract because the contract could be unilaterally

terminated.   Petitioner amended his complaint to add a cause of

action for equitable estoppel.    The court denied relief to

petitioner, finding that he had not shown that he suffered

damages directly related to his reliance on Xircom’s job offer.

D.   Petitioners’ Family

     Petitioners had no source of income other than petitioner’s

employment.   They were devastated by Xircom’s withdrawal of its

job offer to petitioner and AT&T’s refusal to allow him to

rescind his resignation.

     During that time, petitioners did not sleep well and they

became short tempered with each other and their children.

Petitioners separated in October or November 1995 and later

divorced.

E.   Petitioners’ 1994 Return, Extension of Time To Assess, and
     Notice of Deficiency

     Petitioners filed a joint return for 1994 on September 3,

1996.   On June 2, 1999, petitioner signed a Form 872, Consent to

Extend the Time to Assess Tax, extending the period to assess tax
                                - 7 -

for 1994 until October 31, 2000.        Respondent issued the notice of

deficiency to petitioners on April 24, 2000.

                               OPINION

A.   Whether Petitioners May Exclude From Gross Income Under
     Section 104(a)(2) $59,163 That Petitioner Received in 1994

     Petitioners contend that the $59,163 that petitioner

received from Xircom in 1994 is excludable from gross income as

damages for a personal injury under section 104(a)(2).3

Petitioners contend that Xircom and AT&T colluded to prevent

petitioner from being employed by either of them.       Petitioners

contend that, because of petitioner’s job situation, they became

physically ill, lost sleep, suffered emotional distress, and were

divorced, and that the payments were on account of those personal

injuries.4




     3
         Sec. 104(a)(2) provides:

     SEC. 104(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;
     4
        For the year in issue, personal injuries included both
physical and nonphysical injuries. Commissioner v. Schleier, 515
U.S. 323, 329 n.4 (1995).
                                 - 8 -

     Respondent contends that petitioners may not exclude the

Xircom payments from income under section 104(a)(2) because

Xircom paid those amounts to replace wages petitioner would have

earned if Xircom had not withdrawn its job offer.    We agree with

respondent for reasons discussed next.5

     Gross income does not include 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.    Sec. 104(a)(2).   We decide the tax treatment of the

Xircom payments by considering in lieu of what these amounts were

paid.    Bagley v. Commissioner, 105 T.C. 396, 406 (1995), affd.

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

     The April 18, 1994, agreement between petitioner and Xircom

does not state that the payments were on account of personal

injury or sickness.   Where a settlement agreement is silent as to

whether a payment was made on account of a personal injury, the

most important factor in determining the application of section

104(a)(2) is the intent of the payor.     Knuckles v. Commissioner,

349 F.2d 610, 613 (10th Cir. 1965), affg. T.C. Memo. 1964-33;

Agar v. Commissioner, 290 F.2d 283, 284 (2d Cir. 1961), affg. per


     5
        Sec. 7491 applies to court proceedings arising in
connection with examinations commencing after July 22, 1998.
Petitioners do not contend that respondent bears the burden of
proving that sec. 104(a)(2) does not apply, and they introduced
no evidence establishing that the examination in this case
commenced after July 22, 1998. Accordingly, petitioners bear the
burden of proving that sec. 104(a)(2) applies. Rule 142(a)(1).
                                - 9 -

curiam T.C. Memo. 1960-21; Metzger v. Commissioner, 88 T.C. 834,

847-848 (1987), affd. without published opinion 845 F.2d 1013 (3d

Cir. 1988).

     To discern the intent of the payor, we consider the method

used by the payor to determine the amount paid, compare the

agreement to other agreements made by the company, consider the

facts that led to the agreement, and weigh other facts that may

reveal the payor’s intent.    Greer v. United States, 207 F.3d 322,

329 (6th Cir. 2000); Pipitone v. United States, 180 F.3d 859,

864-865 (7th Cir. 1999).    Dennis Hamby (Hamby), Xircom’s director

of human resources in 1994 and 1995, and Randall Holliday

(Holliday), Xircom’s corporate counsel in 1994 and 1995,

testified that Xircom did not pay petitioner the $59,163 on

account of a personal injury.   The parties did not negotiate the

payments at issue on account of personal injuries or sickness

that petitioner may have suffered.

     Xircom paid $59,163 to petitioner in 1994 pursuant to the

April 18, 1994, agreement between petitioner and Xircom.    The

amounts chosen were the amounts of salary petitioner would have

earned at AT&T or Xircom.    Xircom’s practice of offering payments

resembling severance pay to individuals from whom it had

withdrawn an employment offer suggests that Xircom made payments

to petitioner to replace wages.   The fact that Xircom made

monthly payments and that Xircom issued petitioner a Form 1099-
                                - 10 -

MISC for 1994 showing that it had paid him nonemployee

compensation of $59,163 suggests that Xircom thought those

amounts were a substitute for wages.     Lost wages are not excluded

from income under section 104(a)(2) when received as damages

“pursuant to the settlement of economic rights arising out of a

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

revd. on an issue not relevant herein 70 F.3d 34 (5th Cir. 1995).

In contrast, lost wages recovered on behalf of an individual who

is unable to work because of a personal injury, such as an

automobile accident, may be excludable.    See Commissioner v.

Schleier, 515 U.S. 323, 329-330 (1995).

     Petitioner points out that Hamby testified in an earlier

deposition that Xircom made the payments to prevent further harm

to petitioner.    Petitioner contends that Hamby’s use of the term

“harm” shows that the payments were for personal injury or

sickness.    We disagree.   We believe the “harm” Hamby referred to

was the loss of wages.

     Hamby and Holliday testified that Xircom paid petitioner

solely to replace wages that he would have earned.    Xircom had no

financial interest in the characterization of its payments to

petitioner because it could deduct them whether or not petitioner

could exclude them from income.    We find the testimony of Hamby

and Holliday to be credible.
                             - 11 -

     Petitioners testified that they became physically ill, lost

sleep, contracted pneumonia, had headaches, suffered emotional

distress, and divorced as a result of Xircom’s withdrawal of the

employment offer to petitioner.   However, this does not establish

that Xircom had knowledge of, or intended to pay petitioner

damages on account of, personal injuries or sickness.

     Xircom did not pay petitioner for damage to his reputation.

Thus, this case is unlike Fabry v. Commissioner, 223 F.3d 1261,

1270-1271 (11th Cir. 2000), revg. 111 T.C. 305 (1998), where the

U.S. Court of Appeals for the Eleventh Circuit held that, because

the taxpayers’ business reputation was uniquely linked to their

personal reputation, damages paid for injury to the taxpayers’

business reputation were received on account of personal injury

and thus excludable under section 104(a)(2).

     We conclude that petitioners may not exclude from income

Xircom’s payments of $59,163 to petitioner in 1994 because they

were a substitute for wages, and they were not paid on account of

personal injuries or sickness.    See United States v. Burke, 504

U.S. 229, 234 (1992); Robinson v. Commissioner, supra.

B.   Whether Petitioners Are Liable for the Addition to Tax for
     Failure To Timely File Their 1994 Income Tax Return

     Respondent determined and contends that petitioners are

liable for the addition to tax under section 6651(a) for failure

to timely file their income tax return for 1994.   A taxpayer is

liable for an addition to tax of up to 25 percent for failure to
                              - 12 -

timely file a Federal income tax return unless the failure was

due to reasonable cause and not willful neglect.   Sec.

6651(a)(1).

     As stated above, the record is not clear whether section

7491 applies here.   In court proceedings arising in connection

with examinations beginning after July 22, 1998, section 7491(c)

places on the Commissioner the burden of producing sufficient

evidence that it is appropriate to impose the addition to tax

under section 6651(a)(1).   If section 7491(c) applies, respondent

has met the burden of production relating to petitioners’

liability for the addition to tax for failure to timely file

their 1994 return because respondent has shown that petitioners

filed their 1994 return on September 3, 1996.   Thus, petitioners

bear the burden of proving that the failure is due to reasonable

cause and not willful neglect.   See United States v. Boyle, 469

U.S. 241, 245 (1985).

     Petitioners did not address this issue at trial or on brief,

and we deem petitioners to have conceded that they are liable for

the addition to tax for failure to timely file their 1994 income

tax return.   We may deem a taxpayer to have conceded an issue

that was raised in the petition if he or she made no argument at

trial or on brief relating to that issue.   See Levin v.

Commissioner, 87 T.C. 698, 722-723 (1986), affd. 832 F.2d 403

(7th Cir. 1987); Zimmerman v. Commissioner, 67 T.C. 94, 104 n.7
                                 - 13 -

(1976).    We conclude that petitioners are liable for the addition

to tax under section 6651(a) for failure to timely file their

1994 income tax return.

C.   Whether the Time To Assess Tax Against Petitioners for 1994
     Has Expired

     Petitioner contends that the time to assess tax against

petitioners for 1994 expired before respondent issued the notice

of deficiency.    We disagree.   Collins concedes that the time to

assess tax for petitioners’ 1994 tax year has not expired.    On

June 2, 1999, petitioner signed a Form 872, in which he agreed to

extend the time to assess tax for 1994 until October 31, 2000.

Respondent issued the notice of deficiency on April 24, 2000.

Petitioner does not contend that the Form 872 that he signed is

invalid.    We conclude that the time to assess the tax for

petitioners’ 1994 tax year had not expired when respondent issued

the notice of deficiency.

     To reflect the foregoing,

                                                Decisions will be

                                           entered for respondent.
