                         T.C. Memo. 1997-342



                     UNITED STATES TAX COURT



        WILLIAM ROGER AND JOAN ANN THORPE, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14305-96.                      Filed July 28, 1997.




     William Roger Thorpe and Joan Ann Thorpe, pro sese.

     Elizabeth A. Owen and Carol P. Nachman, for respondent.



                         MEMORANDUM OPINION


     ARMEN, Special Trial Judge:    This case is before the Court

on respondent's motion for partial summary judgment, filed

pursuant to Rule 121.1   The issue for decision is whether

1
     Unless otherwise indicated, all Rule references are to the
Tax Court Rules of Practice and Procedure, and all section
                                                   (continued...)
                              - 2 -


petitioners may exclude from gross income under section 104(a)(2)

an amount received by petitioner William Roger Thorpe from his

employer upon termination of employment on the ground that such

amount represents damages received on account of personal injury.

As explained in more detail below, we agree with respondent that

exclusion under section 104(a)(2) is not authorized and that

partial summary judgment in respondent's favor is therefore

appropriate.

Background2

     Petitioner was employed by International Business Machines

Corp. (IBM) until his termination on July 23, 1992.    Petitioner's

termination at IBM was effected through petitioner's

participation in the IBM Modified and Extended Individual

Transition Option Program (ITO-II Program).   The ITO-II Program

allowed IBM employees to resign or retire early, receiving lump-

sum payments and other benefits.

     Petitioner was required to sign a General Release and

Covenant Not to Sue (the release) as a condition of receiving the

1
 (...continued)
references are to the Internal Revenue Code in effect for the
taxable year in issue.
     Respondent's motion was filed as a motion for summary
judgment. We treat it as a motion for partial summary judgment
for the reason discussed infra at note 4.
2
     The following is a summary of the relevant facts that do not
appear to be in dispute; they are stated solely for the purpose
of deciding the pending motion, and they are not findings of fact
for this case. See Fed. R. Civ. P. 52(a); Rule 1(a).
                               - 3 -


lump-sum payment and benefits pursuant to the ITO-II Program.

The release was broadly written and covered any and all possible

and potential claims in contract or in tort arising from

employment or termination of employment.       Pertinent sections of

the release read as follows:

     In exchange for the sums and benefits which you will
     receive pursuant to the terms of the * * * [ITO-II
     Program], [you agree] to release * * * [IBM] from all
     claims, demands, actions or liabilities you may have
     against IBM of whatever kind, including but not limited
     to those which are related to your employment with IBM
     or the termination of that employment. * * * You also
     agree that this release covers, but is not limited to,
     claims arising from the Age Discrimination in
     Employment Act of 1967, as amended, Title VII of the
     Civil Rights Act of 1964, as amended, and any other
     federal or state law dealing with discrimination in
     employment on the basis of sex, race, national origin,
     religion, disability, or age. You also agree that this
     release includes claims based on theories of contract
     or tort, whether based on common law or otherwise.
     This release does not include your vested rights, if
     any, in the IBM Retirement Plan, which survive
     unaffected by this release.

               *    *    *     *       *   *      *

     3.   This release does not waive any claims that you
          may have which arise after the date you sign this
          release.

               *    *    *     *       *   *      *

     6.   In the event of rehire by IBM or any of its
          subsidiaries as a regular employee, you understand
          that IBM reserves the right to require repayment
          of a prorated portion of the ITO-II Program
          payment. The amount of repayment will be based on
          the number of weeks off the IBM payroll compared
          with the number of weeks' salary used to calculate
          your payment.
                                - 4 -


     Petitioner signed the release on July 23, 1992.   Neither at

that time nor at any time during the 5 previous years did

petitioner make any complaint or allegation against IBM, either

formally or informally, for age discrimination or otherwise.

However, petitioner now alleges that he thinks that he has a

claim against IBM for age discrimination; petitioner also alleges

that IBM is responsible for certain business failures that he

suffered after the termination of his employment at IBM.

     In exchange for signing the release and participating in the

ITO-II Program, petitioner received a $68,279 lump-sum payment

(the payment or ITO payment).   The payment was based on years of

service and rate of pay.

     For 1992, petitioner received a Form W-2 from IBM showing

wages, tips, and other compensation in the amount of $121,875.03.

On October 14, 1993, petitioners filed their 1992 Federal income

tax return.   Petitioners reported the $121,875.03 amount on their

return as wages.

     On April 3, 1996, respondent issued a notice of deficiency

to petitioners in which respondent determined a deficiency in

petitioners' Federal income tax for 1992 in the amount of $1,271.

The deficiency is attributable to respondent's disallowance of

various deductions claimed on petitioners' 1992 return.
                                 - 5 -


Petitioners invoked the Court's jurisdiction by filing a timely

petition for redetermination.3

     On August 13, 1996, petitioners filed an amended return for

1992 in which they reduced the amount of their gross income for

1992 by $68,279.   Petitioners contend that their gross income

should be reduced by such amount on the ground that the payment

that petitioner received from IBM is excludable from gross income

under section 104(a)(2).

     On April 18, 1997, respondent filed a Motion for Summary

Judgment.   In the motion, respondent asserts that the issues

raised in the notice of deficiency have been settled.4

Respondent also asserts that the ITO payment is includable in

petitioners' gross income as a matter of law.   Relying primarily

on Commissioner v. Schleier, 515 U.S. 323 (1995), respondent

contends that a payment to a taxpayer may be excluded from gross

income under section 104(a)(2) only when the taxpayer can

establish: (1) The underlying cause of action giving rise to the

payment is based upon tort or tort-type rights and (2) the

payment is received by the taxpayer on account of personal

injuries or sickness.   With these elements in mind, respondent

3
     At the time that the petition was filed, petitioners resided
in Georgetown, Texas.
4
     No stipulation of settled issues or other such stipulation
has been filed by the parties regarding any of the issues raised
by the notice of deficiency. Accordingly, we regard respondent's
motion as one for partial summary judgment only.
                                 - 6 -


contends that summary judgment is warranted on the following

grounds: (1) Petitioner did not have a claim against IBM at the

time that he signed the release by which he obtained the ITO

payment; (2) IBM did not make the payment on account of personal

injury or sickness; (3) no portion of the payment is allocated to

any personal injury or other claim; and (4) a payment made to a

taxpayer under the Age Discrimination in Employment Act (ADEA) is

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

Included as an attachment to respondent's Motion for Summary

Judgment is a letter from petitioner to respondent's counsel

dated January 21, 1997, setting forth petitioners' position

regarding the basis for the exclusion of the ITO payment from

petitioners' gross income.

     This matter was called for hearing at the Court's motions

session in Washington, D.C., on May 28, 1997.    Counsel for

respondent appeared at the hearing and presented argument in

support of the pending motion.    Although petitioners did not

appear at the hearing, they did file a written statement with the

Court pursuant to Rule 50(c).

     Petitioners' Rule 50(c) statement includes allegations that

IBM is responsible for certain business failures that petitioner

suffered after terminating his employment at IBM.    In addition,

petitioner asserts that the release that he signed at the time of

his resignation from IBM represented a settlement under which he
                                - 7 -


agreed to forgo filing suit against IBM for willful age

discrimination in exchange for $68,279.5

Discussion

     A motion for summary judgment is appropriate "if the

pleadings, answers to interrogatories, depositions, admissions,

and any other acceptable materials, together with the affidavits,

if any, show that there is no genuine issue as to any material

fact and that a decision may be rendered as a matter of law."

Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520

(1992), affd. 17 F.3d 965 (7th Cir. 1994).     The moving party

bears the burden of proving that there is no genuine issue of

material fact, and factual inferences are viewed in the light

most favorable to the nonmoving party.     United States v. Diebold,

Inc., 369 U.S. 654, 655 (1962); Preece v. Commissioner, 95 T.C.

594, 597 (1990).    The opposing party cannot rest upon mere

allegations or denials, but must set forth specific facts showing

there is a genuine issue for trial.     Rule 121(d).   The existence

of any reasonable doubt as to the facts will result in denial of

the motion for summary judgment.    Hoeme v. Commissioner, 63 T.C.

18, 20 (1974).

     Except as otherwise provided, gross income includes income

from all sources.    Sec. 61(a); Commissioner v. Glenshaw Glass

5
     We note that petitioner does not expressly rely on the ADEA
as the cause of action underlying the settlement. See
Commissioner v. Schleier, 515 U.S. 323, 332 n.6 (1995).
                               - 8 -


Co., 348 U.S. 426 (1955).   Although section 61(a) is to be

broadly construed, statutory exclusions from income are narrowly

construed.   Commissioner v. Schleier, supra at 327-328; Kovacs v.

Commissioner, 100 T.C. 124, 128 (1993), affd. without published

opinion 25 F.3d 1048 (6th Cir. 1994).

     Under section 104(a)(2), 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".   Section 1.104-1(c), Income Tax

Regs., provides in pertinent part:
                                 - 9 -


          (c) Damages received on account of personal
     injuries or sickness. * * * The term "damages
     received (whether by suit or agreement)" means 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.

     Thus, an amount may be excluded from gross income only when

it was received both: (1) Through prosecution or settlement of an

action based upon tort or tort-type rights; and (2) on account of

personal injuries or sickness.     Commissioner v. Schleier, supra;

Wesson v. United States, 48 F.3d 894, 901-902 (5th Cir. 1995);

Bagley v. Commissioner, 105 T.C. 396, 416 (1995).

     When damages are received pursuant to a settlement

agreement, the nature of the claim that was the actual basis for

settlement controls whether such damages are excludable under

section 104(a)(2).   United States v. Burke, 504 U.S. 229, 237

(1992); Thompson v. Commissioner, 866 F.2d 709, 711 (4th Cir.

1989), affg. 89 T.C. 632 (1987); Robinson v. Commissioner, 102

T.C. 116, 126 (1994), affd. in part, revd. in part 70 F.3d 34

(5th Cir. 1995).   "[T]he critical question is, in lieu of what

was the settlement amount paid?"     Bagley v. Commissioner, supra

at 406.

     Determination of the nature of the claim is factual.     Bagley

v. Commissioner, supra; Stocks v. Commissioner, 98 T.C. 1, 11

(1992).   The first requirement is the existence of a claim based

upon tort or tort-type rights.     Commissioner v. Schleier, supra
                               - 10 -


at 337.    The claim must be bona fide, but not necessarily valid;

i.e., sustainable.    Taggi v. United States, 35 F.3d 93, 96 (2d

Cir. 1994); Robinson v. Commissioner, supra at 126; Stocks v.

Commissioner, supra at 10.    In this connection, we have held that

claims for potential future personal injuries do not qualify for

exclusion under section 104(a).     Roosevelt v. Commissioner, 43

T.C. 77 (1964); Starrels v. Commissioner, 35 T.C. 646 (1961),

affd. 304 F.2d 574 (9th Cir. 1962).     Those holdings imply that

there must be an existing claim.    Moreover, although a claim need

not have been previously asserted, the absence of any knowledge

of the claim on the part of the employer-payor obviously has a

negative impact in determining the requisite intent for the

payment.    Sodoma v. Commissioner, T.C. Memo. 1996-275; see also

Keel v. Commissioner, T.C. Memo. 1997-278; Foster v.

Commissioner, T.C. Memo. 1996-26.

     Petitioner asserts that, at the time that he signed the

release, he had a bona fide claim against IBM for age

discrimination and that he executed the release and accepted the

ITO payment from IBM in lieu of litigation.     Respondent contends

that petitioner's failure to lodge, much less even allege, any

tort-type claim against IBM prior to or at the time of signing

the release establishes that there was no bona fide dispute

between petitioner and IBM that could provide the basis for
                               - 11 -


settlement.    We agree with respondent that the ITO payment is not

excludable from petitioners' gross income.

     Petitioners do not allege, nor does the record otherwise

show, that petitioner ever made any formal or informal claim

against IBM.   It therefore appears that there was no settlement

for IBM and petitioner to reach.

     However, even if we assume that the executed Release

represents a settlement agreement, then for the payment to be

excludable, petitioners must show that the payment is based upon

(1) tort or tort-type rights, and (2) on account of personal

injuries or sickness.

     We now turn to the language of the release itself.   The

release in this case is the same as that in Webb v. Commissioner,

T.C. Memo. 1996-50, and essentially the same as that in Sodoma v.

Commissioner, supra.    By its terms, petitioner released IBM from

liability for both contract and tort claims.    The release,

however, does not specifically indicate that the lump-sum payment

received by petitioner was paid to settle a potential personal

injury claim against IBM.    We note that when the settlement

agreement lacks express language stating what the settlement

amount was paid to settle, then the most important factor is the

intent of the payor.    Knuckles v. Commissioner, 349 F.2d 610, 612

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

Commissioner, supra at 10.    Here, respondent contends, and we
                               - 12 -


agree, that IBM did not make the payment on account of a personal

injury.    The release form appears to be a standard document used

by IBM for all of its employees who participated in the ITO-II

Program.   Moreover, the amount of the ITO payment was calculated

on the number of years of service and petitioner's salary.

Finally, the release states that if petitioner were rehired by

IBM, he could be required to repay some portion of the ITO

payment based on the number of weeks off the IBM payroll compared

with the number of weeks' salary used to calculate the payment.

As in Sodoma v. Commissioner, supra, and Webb v. Commissioner,

supra, the lump-sum payment herein appears to have been severance

pay, rather than a payment for personal injury.    Severance pay,

just like the pay it replaces, is taxable income.

     Finally, we note that petitioners have not alleged or come

forward with any evidence of the specific amount of the ITO

payment that is allegedly allocable to claims of tort or tort

type damages for personal injuries.     Failure to do so results in

the entire amount being presumed to be taxable.    See Taggi v.

United States, supra; Getty v. Commissioner, 91 T.C. 160, 175-176

(1988), affd. as to this issue and revd. on other issues 913 F.2d

1486 (9th Cir. 1990).   The release makes no allocation, and

petitioners have not set forth any facts upon which they would

rely to prove an allocation.   Indeed, the fact that the ITO

payment was based on time of service and rate of pay demonstrates
                               - 13 -


its character as severance pay, rather than a payment for

personal injury.    See Webb v. Commissioner, supra, Sodoma v.

Commissioner, supra, and Keel v. Commissioner, supra, which

involved the same payor and substantially the same plan as

involved herein.

     In sum, viewing the facts in a light most favorable to

petitioners, we conclude that respondent has made a prima facie

case to support a motion for summary judgment and that

petitioners have failed to come forward with countervailing

assertions having sufficient specificity to cause us to hold that

there is any material issue of fact that requires a trial.

Accordingly, we shall grant respondent's motion for partial

summary judgment.    See Phillips v. Commissioner, T.C. Memo. 1997-

336 (summary judgment granted for the Commissioner regarding

taxability of payment made by IBM pursuant to the ITO-II

Program); Brennan v. Commissioner, T.C. Memo. 1997-317 (same);

Morabito v. Commissioner, T.C. Memo. 1997-315 (same).

     To reflect the foregoing,



                                      An appropriate order

                                 will be issued.
