                        T.C. Memo. 1997-345



                      UNITED STATES TAX COURT




         JOSEPH J. AND LILLIAN A. GAJDA, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2210-97.                        Filed July 28, 1997.




     Leonard L. Leighton, for petitioners.

     Elizabeth A. Owen, for respondent.



                        MEMORANDUM OPINION


     PARR, Judge:   This case is before us on respondent's motion

for summary judgment under Rule 121.1   Respondent determined a

1
     All section references are to the Internal Revenue Code in
effect for the taxable year in issue, and all Rule references are
to the Tax Court Rules of Practice and Procedure, unless
                                                   (continued...)
                               - 2 -


deficiency in petitioners' Federal income tax of $33,343 for the

taxable year 1993.   The term "petitioner" refers to Joseph J.

Gajda.

     The issue for decision is whether petitioner may exclude

from gross income under section 104(a)(2) amounts received from

his employer upon termination of his employment on the ground

that such amounts represented damages received on account of

personal injury.   At the time the petition in this case was

filed, petitioners resided in Round Rock, Texas.

     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

1
 (...continued)
otherwise indicated. All dollar amounts are rounded to the
nearest dollar, unless otherwise indicated.
                              - 3 -


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).

     The facts presented below are stated solely for purposes of

deciding respondent's motion for summary judgment.

Background

     Prior to and during a portion of 1993, petitioner was

employed by International Business Machines Corp. (IBM).   At the

time petitioner ceased his employment with IBM, he was over 40

years old.

     At some time during 1993, petitioner became eligible to

participate in the IBM Modified and Extended Individual

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

allows 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 for the sums and benefits, including the lump-sum

payment pursuant to the ITO II program.2   The release is broadly


2
     Petitioners' counsel has failed to provide respondent with a
copy of the release signed by petitioner. Respondent attached to
his memorandum of authorities submitted to this Court a copy of
the release used by IBM in the ITO II program. Petitioner did
not contest the submission of the release in petitioner's
response to respondent's motion for summary judgment. In fact,
petitioner refers to the release as if it is the release
petitioner signed. Thus we treat it as such.
                               - 4 -


written and covers 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], (Name of Individual) (hereinafter "you")
     agrees 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.

                *    *    *    *       *   *   *

     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.

     At some time during 1993, petitioner signed the release.    At

the time of signing the release petitioner had no legal claims

for unlawful employment practices pending against IBM, nor had he

lodged any informal complaints against the company.   Petitioner,

however, thought that he was forced by IBM to leave the company
                                - 5 -


and therefore had a claim against IBM for age discrimination and

emotional distress.

     In exchange for signing the release and participating in the

ITO II Program, petitioner received a $91,690 lump-sum payment

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

service and rate of pay.

     For the year 1993 petitioner received a Form W-2 from IBM

showing wages, tips, and other compensation as $228,290.3   On

April 15, 1994, petitioners filed a 1993 joint Federal income tax

return.   Petitioners reported the $228,290 as wages, subtracted

the $91,690 ITO payment therefrom, and attached a disclosure

statement to their return, asserting that the ITO payment is

excludable from gross income pursuant to section 104(a)(2) as a

payment received in exchange for the release and settlement of

tortlike rights.    Respondent determined that the ITO payment was

fully taxable severance pay.

Discussion

     Except as otherwise provided, gross income includes income

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

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

construed, statutory exclusions from income are narrowly

construed.   Commissioner v. Schleier, 515 U.S. 323, 328 (1995);


3
     On July 2, 1996, petitioners filed an amended return on
which they excluded the $91,690 from gross income.
                               - 6 -


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:

          (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 tortlike 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).

     Where 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 and revd. in part 70 F.3d 34
                                 - 7 -


(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.     Id.;

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 at 331.    The claim

must be bona fide, but not necessarily valid; i.e., sustainable.

Sodoma v. Commissioner, T.C. Memo. 1996-275 (citing 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 note that 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).     Such holdings imply that there must be

an existing claim.

     Petitioner asserts that IBM was engaging in systematic

discrimination against employees over the age of 40, that he was

forced to leave the company because of his age, that as a result

he has been diagnosed as having a "major depression" for which he

is presently under psychiatric care, and that age discrimination

was the primary concern of IBM in requiring petitioner to sign

the release.   Therefore, petitioner contends that IBM accepted
                              - 8 -


his ITO II Program participation request and subsequent release

in lieu of litigation.

     Respondent argues, pursuant to Commissioner v. Schleier,

supra, that even if petitioner could establish an underlying

cause of action for age discrimination, a payment made pursuant

to the Age Discrimination in Employment Act of 1967 is not

excludable from income under section 104(a)(2).   Age

Discrimination in Employment Act of 1967 (ADEA), Pub. L. 90-202,

81 Stat. 602 (current version at 29 U.S.C. secs. 621-634 (1994)).



     Petitioner, however, has not limited his arguments to claims

brought against IBM under the ADEA.   Rather, petitioner asserts

that he released IBM from liability for "potential tort claims",

which would include both a claim for age discrimination under the

ADEA and a common law cause of action for emotional distress.   To

support his position, petitioner relies on Commissioner v.

Schleier, supra at 332 n.6, for the proposition that "intangible

harms of discrimination can constitute personal injury, and that

compensation for such harms may be excludable under §104(a)(2)."

     Viewing the facts in the light most favorable to petitioner,

it can be argued that petitioner had a potential tortlike claim

for infliction of emotional distress.   Thus, we assume, for

purposes of this motion only, that petitioners have met the first

prong of excludability under section 104(a)(2).
                                - 9 -


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

release in this case is the same as that in Brennan v.

Commissioner, T.C. Memo. 1997-317, and 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 where 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.    Respondent argues that petitioner's

failure to lodge any informal or legal tortlike claim against IBM

prior to and 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 settlement.

     To prevail under section 104(a)(2), petitioner is not

required to have asserted a legal claim against IBM prior to

signing the release; however, 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 of the payment.

Brennan v. Commissioner, supra; Sodoma v. Commissioner, supra;
                              - 10 -


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

Commissioner, T.C. Memo. 1996-26.      Respondent further argues

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

injury.   The release form is a standard document used by IBM for

all of its employees who participate in the ITO II Program.

Moreover, the amount of the $91,690 lump-sum 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

lump-sum payment based on the number of weeks off the IBM payroll

compared with the number of weeks' salary used to calculate the

lump-sum payment.   As in Brennan v. Commissioner, supra, 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 petitioner has not alleged or come

forward with any evidence of the specific amounts of the payments

allocable to claims of tort or tortlike damages for personal

injuries.   The release makes no allocation, and petitioner has

not set forth any facts upon which he would rely to prove an

allocation.   Indeed, the fact that the $91,690 was based on years

of service and rate of pay points in the direction of its having

been severance pay rather than a payment for personal injury.
                             - 11 -


See Brennan v. Commissioner, supra, which involved the same payor

and the same plan as involved herein.

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

petitioner, we conclude that respondent has made a prima facie

case to support a motion for summary judgment and that petitioner

has failed to come forward with countervailing assertions having

sufficient specificity to cause us to hold that there is any

material issue of fact which requires a trial.    Accordingly, we

hold that respondent's motion for summary judgment will be

granted.

     To reflect the foregoing,



                                 An appropriate order and decision

                         will be entered granting respondent's

                         motion for summary judgment.
