                  T.C. Summary Opinion 2006-86



                     UNITED STATES TAX COURT



                GERALDINE ANN PECK, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 22437-04S.            Filed May 23, 2006.


     Geraldine Ann Peck, pro se.

     Jeremy L. McPherson, for respondent.



     PANUTHOS, Chief Special Trial Judge:   This case was heard

pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect at the time the petition was filed.   The

decision to be entered is not reviewable by any other court, and

this opinion should not be cited as authority.   Unless otherwise

indicated, subsequent 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.
                                 - 2 -

     Respondent determined a deficiency in petitioner’s 2000

Federal income tax of $8,887.    After a concession by petitioner,1

the issue for decision is whether petitioner’s gross income

includes $50,000 of settlement proceeds she received from her

former employer.

                              Background

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

The stipulation of facts with attached exhibits, and an

additional exhibit admitted at trial, are incorporated herein by

this reference.    At the time the petition was filed, petitioner

resided in Redding, California.

     Petitioner began working as a special education teacher for

the Shasta County Office of Education (SCOE) in 1986.    By the

late 1990s, petitioner’s relationship with SCOE had deteriorated

significantly.     In 1999, SCOE had petitioner evaluated by a panel

of mental health experts and filed a complaint against her in

State court.   The complaint alleges that petitioner is mentally

unfit to teach and seeks to place her on mandatory sick leave.

SCOE filed the complaint as part of its efforts to terminate

petitioner’s employment.




     1
       Petitioner concedes that a $491 income tax refund she
received from the State of California is taxable. The remaining
adjustment in respondent’s notice of deficiency is computational;
therefore, we do not address it.
                              - 3 -

     Petitioner denied that she was unfit to teach.     A pleading

petitioner filed with the State court asserts:   (1) Petitioner

“is not suffering from a mental illness which prevents her from

performing her duties as a special education teacher”; and (2)

“even if she does suffer from a mental illness * * * she is more

than competent to perform her duties”.

     In September 2000, the State court case was resolved

pursuant to a written settlement agreement.    Petitioner resigned

her position and executed a release of claims against SCOE.    In

exchange, SCOE paid petitioner $50,000.

     On her 2000 Federal income tax return, petitioner did not

report the $50,000 as gross income.   Petitioner had suffered from

various physical ailments during her employment with SCOE,

including diabetes, inner ear pain, and impetigo.   Petitioner

believed that the $50,000 was, in whole or in part, compensation

for these injuries and therefore nontaxable.   Respondent

determined that the $50,000 was includable in petitioner’s gross

income and issued a notice of deficiency to petitioner on

September 2, 2004.

                           Discussion

     In general, the Commissioner’s determinations set forth in a

notice of deficiency are presumed correct, and the taxpayer bears

the burden of showing that the determinations are in error.    Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).    Pursuant
                                - 4 -

to section 7491(a), the burden of proof as to factual matters

shifts to respondent under certain circumstances.     Petitioner has

neither alleged that section 7491(a) applies nor established her

compliance with the requirements of section 7491(a)(2)(A) and (B)

to substantiate items, maintain records, and cooperate fully with

respondent’s reasonable requests.    Petitioner therefore bears the

burden of proof.

     A taxpayer’s gross income includes all income from whatever

source derived unless excluded by a specific provision of the

Internal Revenue Code.    Sec. 61(a).   Gross income does not

include “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”.    Sec. 104(a)(2).   To qualify for this

exclusion, the taxpayer must demonstrate:     (1) The underlying

cause of action giving rise to the recovery is based upon tort or

tort type rights; and (2) the damages were received on account of

personal physical injuries or physical sickness.     Commissioner v.

Schleier, 515 U.S. 323, 337 (1995); Allum v. Commissioner, T.C.

Memo. 2005-177.    The terms “physical injury” and “physical

sickness” do not include emotional distress, except to the extent

of damages not in excess of the amount paid for medical care

attributable to emotional distress.     Sec. 104(a) (flush

language); see also Prasil v. Commissioner, T.C. Memo. 2003-100.
                                - 5 -

     When damages are received pursuant to a settlement

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

settlement controls whether such amounts are excludable under

section 104(a)(2).    United States v. Burke, 504 U.S. 229, 233

(1992); Prasil v. Commissioner, supra.     The determination of the

nature of the claim is a factual inquiry and is generally made by

reference to the settlement agreement.     Robinson v. Commissioner,

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

34 (5th Cir. 1995).   If the settlement agreement lacks express

language stating what the settlement amount was paid to settle,

we look to the intent of the payor, based on all the facts and

circumstances of the case, including the complaint that was filed

and the details surrounding the litigation.     Knuckles v.

Commissioner, 349 F.2d 610, 613 (10th Cir. 1965), affg. T.C.

Memo. 1964-33; Allum v. Commissioner, supra.

     Here, the settlement agreement provides that SCOE will pay

petitioner $50,000 in exchange for her resignation and a release

of claims.   The settlement agreement does not mention

petitioner’s diabetes or other ailments.    Instead, it refers

generally to “Disputes and disagreements” between the parties and

contains boilerplate language that releases SCOE from “any and

all claims” by petitioner.

     Looking beyond the settlement agreement, we likewise find no

indication that SCOE intended the $50,000 to compensate
                                 - 6 -

petitioner for physical injuries.    The complaint that SCOE filed

in State court alleges that petitioner is mentally unfit to

teach, but it says nothing about her physical health.       The other

pleadings filed in connection with the State court case also omit

any mention of petitioner’s physical condition.        Petitioner

argues that she suffered work-related physical injuries while

employed with SCOE and that SCOE was aware of her injuries.         Even

if petitioner is correct, however, the question is whether the

$50,000 was paid on account of such injuries.       See sec.

104(a)(2).   There is nothing in the record linking the settlement

proceeds to petitioner’s diabetes or other physical injuries.

Accordingly, respondent’s determination is sustained.       Based on

our resolution of this issue, we do not address whether the

underlying cause of the State court action was based upon tort or

tort type rights.   See Allum v. Commissioner, supra.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,


                                              Decision will be entered

                                         for respondent.
