                         T.C. Memo. 2003-168



                       UNITED STATES TAX COURT



                 ROBERT HENDERSON, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12135-01.                Filed June 9, 2003.


     Robert Henderson, pro se.

     Linette B. Angelastro, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:    Respondent determined a deficiency of

$1,042 in petitioner’s Federal income tax for 1999.1   After a




     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                                 - 2 -

concession by respondent,2 the issue for decision is whether a

$5,000 payment that Robert Henderson (Mr. Henderson) received in

1999 in settlement of a claim against Morgan, Stanley, Dean

Witter & Co. (Morgan Stanley) is excludable from petitioner’s

gross income under section 104(a)(2).    We hold that it is not.

                         FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are

incorporated herein by reference.    At the time he filed the

petition, Mr. Henderson resided in Ojai, California.

A.   Petitioner’s Motel Dispute

     For a period of time during 1997, Mr. Henderson stayed at a

motel in Monterey, California.    To pay for his accommodations,

Mr. Henderson used a credit card called Prime Option issued by

Morgan Stanley.   Following a dispute with the motel owner, Mr.

Henderson paid the credit card account balance and canceled the

credit card.

     Approximately 10 weeks later in February 1998, the motel

charged Mr. Henderson $780.   Morgan Stanley accepted and paid the

$780 charge to Mr. Henderson’s account.     Morgan Stanley then

attempted collection from Mr. Henderson.     When Mr. Henderson




     2
       Respondent concedes that petitioner is not liable for
self-employment tax of $706 under sec. 1402(a), reducing
petitioner’s deficiency to $336.
                                 - 3 -

refused to pay this charge, Morgan Stanley reported to credit

agencies that Mr. Henderson had defaulted on the account.

B.   Petitioner’s Lawsuit Against Morgan Stanley

     On November 18, 1998, Mr. Henderson filed suit against

Morgan Stanley in the U.S. District Court for the Northern

District of California.     On December 6, 1999, the parties reached

a settlement wherein Morgan Stanley agreed to pay Mr. Henderson

$5,000.

C.   Settlement Agreement

     Mr. Henderson and Morgan Stanley memorialized this

settlement by executing a document entitled “Settlement and

Release Agreement” (settlement agreement).    The settlement

provides, in part:

     1.   [Morgan Stanley] shall pay to [Mr. Henderson] the
          total sum of $5,000.

     2.   Effective upon receipt of the payment referred to
          above, [Mr. Henderson] hereby releases and fully
          discharges [Morgan Stanley] from any and all
          claims, demands, damages, and causes of action
          [Mr. Henderson] now has or in the future may have
          for detriment alleged in the pending action.

     3.   [Morgan Stanley] hereby agrees to make a written
          request to remove the Prime Option trade line from
          the credit reports of the three major credit
          agencies in regard to the matters raised in the
          pending action.

     4.   [Morgan Stanley] agrees to arrange to have the
          debt attributed to [Mr. Henderson] * * * forgiven.
                                - 4 -

     The settlement agreement did not allocate the $5,000

settlement payment among monetary, emotional, and physical

damages.

D.   1999 Tax Return

     During 1999, Mr. Henderson received $5,000 from Discover

Financial Services, Inc., in settlement of the lawsuit against

Morgan Stanley.    On April 15, 2000, Mr. Henderson timely filed

his 1999 Federal income tax return.      On his 1999 Federal tax

return, Mr. Henderson excluded from gross income the $5,000

settlement payment.    Respondent issued a notice of deficiency to

Mr. Henderson regarding his 1999 tax year.      In the notice of

deficiency, respondent determined, inter alia, that petitioner

failed to report taxable compensation of $5,000 for 1999.

                               OPINION

     Petitioner does not dispute receiving the $5,000 settlement

payment in 1999 to settle petitioner’s claim against Morgan

Stanley.   Petitioner contends, however, that the $5,000

settlement payment is not taxable because it comes under the

exclusion of section 104(a)(2).    Respondent argues that the

$5,000 settlement payment is includable in petitioner’s gross

income for 1999.    For the reasons stated below, we agree with

respondent.

     Section 61(a) provides that “gross income means all income

from whatever source derived” except as otherwise provided.        The
                                 - 5 -

definition of gross income is broad in scope, Commissioner v.

Glenshaw Glass Co., 348 U.S. 426, 429-430 (1955), and exclusions

from gross income are narrowly construed, United States v. Burke,

504 U.S. 229, 248 (1992); United States v. Centennial Sav. Bank

FSB, 499 U.S. 573, 583 (1991).

     Respondent’s determinations in the notice of deficiency are

presumed correct, and petitioner must prove those determinations

wrong in order to prevail.3   Rule 142(a); Welch v. Helvering, 290

U.S. 111, 115 (1933).   As relevant to the present case, 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”.4

The term “damages received” 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.”    Sec. 1.104-1(c), Income Tax Regs.

Section 104(a) further provides that “emotional distress shall


     3
       Petitioner does not contend that sec. 7491(a) is
applicable to this case.
     4
       The Small Business Job Protection Act of 1996, Pub. L.
104-188, sec. 1605, 110 Stat. 1838 (1996 amendment), amended sec.
104(a)(2) to narrow the exclusion for personal injury damages
received pursuant to a judgment or settlement, effective for
amounts received after Aug. 20, 1996. Under the 1996 amendment,
personal injury or sickness must be physical in nature.
Moreover, the amendment explicitly excepts punitive damages from
the exclusion provided by sec. 104(a)(2).
                               - 6 -

not be treated as a physical injury or physical sickness” for

purposes of section 104(a)(2) (except for damages not in excess

of the amount paid for medical care attributable to emotional

distress).   Prasil v. Commissioner, T.C. Memo. 2003-100.

According to the legislative history of section 104(a)(2), “the

term emotional distress includes symptoms (e.g., insomnia,

headaches, stomach disorders) which may result from such

emotional distress.”   H. Conf. Rept. 104-737, at 301 n.56 (1996),

1996-3 C.B. 741, 1041 n.56.

     Generally, damages are excludable from gross income if they

satisfy two requirements.   The Supreme Court in Commissioner v.

Schleier, 515 U.S. 323, 336 (1995), established those

requirements as:

     First, the taxpayer must demonstrate that the
     underlying cause of action giving rise to the recovery
     is ‘based upon tort or tort type rights’; and second,
     the taxpayer must show that the damages were received
     ‘on account of personal injuries or sickness.’ * * *

     The U.S. Court of Appeals for the Ninth Circuit, the court

to which this case is appealable, held prior to the amendment of

section 104(a)(2) that defamation may be considered a personal

injury for purposes of section 104(a)(2).   Roemer v.

Commissioner, 716 F.2d 693 (9th Cir. 1983), revg. 79 T.C. 398

(1982).   However, the amendment to section 104(a)(2), which does

not otherwise change the section 104(a)(2) analysis set forth in

Schleier, now requires that the payments be “on account of
                               - 7 -

personal physical injuries or physical sickness” for payments

made after August 20, 1996.

     In the instant case, petitioner received the $5,000

settlement payment pursuant to a settlement agreement with Morgan

Stanley.   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, supra at 237.     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 on another issue 70 F.3d 34 (5th Cir. 1995),

and cases cited therein.   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

filed and details surrounding the litigation.   Knuckles v.

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

Memo. 1964-33; Robinson v. Commissioner, supra at 127.     If a

settlement is attributable to claims based on tort or tort type

rights as well as other rights, it may be necessary to determine

which portion of the settlement is attributable to damages

received based on tort or tort type rights.   Similarly, it may be

necessary to determine which portion, if any, of the settlement
                                 - 8 -

may be attributable to damages received for personal physical

injuries or physical sickness.

     In the present case, we find petitioner meets the first part

of the Schleier test, having brought a tort type action against

Morgan Stanley alleging harm to his credit reputation.       We now

turn to the question of whether the $5,000 settlement payment was

received on account of a personal physical injury or physical

sickness.    Petitioner asserts that Morgan Stanley paid the $5,000

settlement payment to petitioner as a result of damage he

suffered to his credit reputation.       The record, however, is

devoid of specific information indicating that Morgan Stanley

issued the settlement payment on account of damage to

petitioner’s credit reputation.    We are not required to, and do

not, accept petitioner’s self-serving testimony without

corroborating evidence.    Lerch v. Commissioner, 877 F.2d 624,

631-632 (7th Cir. 1989), affg. T.C. Memo. 1987-295; Geiger v.

Commissioner, 440 F.2d 688, 689-690 (9th Cir. 1971), affg. per

curiam T.C. Memo. 1969-159; Tokarski v. Commissioner, 87 T.C. 74,

77 (1986).   Further, the record does not support a conclusion

that petitioner’s harm constitutes a physical injury or a

physical sickness caused by the conduct of Morgan Stanley.         On

brief, petitioner alleged that he suffers from a “life-

threatening, pre-existing physical illness” exacerbated by the

harm to his personal reputation.    Assertions on briefs are not
                               - 9 -

evidence.   Rule 143(b); Davis v. Commissioner, T.C. Memo. 1997-

80.

      Even assuming arguendo that petitioner suffered from a

personal physical injury or physical sickness, the record does

not support the conclusion that petitioner received the $5,000

settlement payment on account of such physical injury or physical

sickness.   According to the settlement agreement, petitioner

released “any and all claims” against Morgan Stanley in exchange

for $5,000.   The settlement agreement, however, did not

specifically carve out any portion of the settlement payment as a

settlement on account of personal physical injury or physical

sickness, let alone make reference to a physical injury or a

physical sickness resulting from any reputation damage by Morgan

Stanley.

      The settlement agreement did not allocate any part of the

settlement payment on account of a personal physical injury or

physical sickness.   Furthermore, the evidence in the record does

not support such an allocation.   Accordingly, we conclude that no

portion of the $5,000 settlement payment was compensation for a

personal physical injury or physical sickness.   Therefore, we

sustain respondent’s determination in this regard.

      We have considered all of the other arguments made by the

parties and, to the extent that we have not specifically

addressed them, we conclude they are without merit.
                        - 10 -

To reflect the foregoing,

                                     Decision will be

                                 entered for respondent.
