                          T.C. Memo. 2001-135



                        UNITED STATES TAX COURT



     WILLIAM J. BROEDEL AND JOAN C. BROEDEL, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2405-98.                          Filed June 8, 2001.


     William J. Broedel and Joan C. Broedel, pro sese.

     Anne D. Melzer, Edward D. Fickess, and John D. Steele, Jr.,

for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION


     RUWE, Judge:     Respondent determined a deficiency of $18,161

in petitioners’ joint 1994 Federal income tax.      The issues for

decision are:    (1) Whether $58,372.50 received from the State

University of New York Institute of Technology in 1994 is

excludable from petitioners’ gross income under section
                               - 2 -

104(a)(2);1 and (2) whether petitioners realized $13,393.54 in

income in 1994 from the New York State and Local Retirement

System.

                          FINDINGS OF FACT

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

The stipulation of facts, the supplemental stipulation of facts,

the second supplemental stipulation of facts, and the attached

exhibits are incorporated herein by this reference.   Petitioners,

Mr. Broedel and Mrs. Broedel, resided in Marcy, New York, at the

time they filed their petition.

     Mr. Broedel served in New York State law enforcement for

approximately 28 years, the last 11 years as a lieutenant with

the Public Safety Department at the State University of New York

Institute of Technology (SUNY) in Rome, New York.   In 1992 and

1993, SUNY issued several notices of discipline to Mr. Broedel

for alleged misconduct.   In September of 1993, SUNY proposed

terminating Mr. Broedel’s employment for disciplinary reasons.

On September 30, 1993, Mr. Broedel filed a formal complaint with

the New York State Division of Human Rights (NYSDHR) charging

SUNY with “an unlawful discriminatory practice relating to

employment in violation of Article 15 of the Executive Law of the

State of New York (Human Rights Law)” because of age and



     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue.
                                 - 3 -

disability.   The complaint alleged that during 1992 and 1993,

SUNY had repeatedly harassed and discriminated against Mr.

Broedel and pressured him to retire.     The complaint alleged

injuries of “financial loss, pain and mental anguish.”2    The

complaint was later crossfiled with the Equal Employment

Opportunity Commission (EEOC).

     A hearing was scheduled for December 14, 1993, before

William Babiskin (Mr. Babiskin), an impartial arbitrator,

regarding the notices of discipline issued to Mr. Broedel.       On

the day of the hearing, Mr. Broedel, Richard Lesniak3 (Mr.

Lesniak), and Robert Patterson4 (Mr. Patterson) met with Richard

Hasselbach (Mr. Hasselbach), the attorney representing SUNY’s

interests, and Anthony Panebianco (Mr. Panebianco), the Director

of Human Resources for SUNY and authorizing official with respect

to any settlement amount SUNY would pay, to discuss the

possibility of a settlement.   The parties agreed that Mr. Broedel

would retire immediately in exchange for an amount equal to one

and one-half times Mr. Broedel’s annual salary.     The parties then

met with Mr. Babiskin, and the terms of the settlement agreement

were written out by him and incorporated into a consent award.



     2
      The complaint alleged that harassment by SUNY caused Mr.
Broedel to be hospitalized for stress and high blood pressure.
     3
      Richard Lesniak was Mr. Broedel’s union steward.
     4
      Robert Patterson was a union representative.
                               - 4 -

The consent award provided:

     1. Grievant, William Broedel, will be paid back pay
     and all attendant benefits retroactive to September 17,
     1993.

     2. Grievant shall be entitled to a lump sum cash
     payment equivalent to one and one-half [1½] times his
     present annual salary rate. Said payments shall be
     made in two (2) equal installments. The first payment
     shall be made on or before March 31, 1994. The second
     payment shall be made on or after July 2, 1994.

     3. Grievant, William Broedel, will retire effective
     December 14, 1993.

     4. Grievant will execute a general release to the
     State University of New York relieving the University,
     its officers, agents, employees, and students of any
     and all liability arising out of and/or in connection
     with his employment with the State University of New
     York. Said release shall be executed forthwith.

     5. Grievant’s complaint before the Human Rights
     Commission is deemed withdrawn with prejudice and the
     Commission shall be notified, in writing, accordingly.

     6. Any and all Notices of Discipline issued against
     grievant are hereby withdrawn with prejudice.

     7. The parties will draft a mutually acceptable letter
     of reference concerning grievant’s employment by SUNY.

     8. The arbitrator will retain jurisdiction to monitor
     compliance with the terms and conditions of this Award.

The consent award was signed by Mr. Babiskin and dated December

15, 1993.   In accordance with the settlement agreement, Mr.

Broedel withdrew his complaints against SUNY and retired.    Under

the terms of the settlement agreement, the amount Mr. Broedel was

to receive was allocated between (1) backpay and attendant

benefits, and (2) an amount equal to one and one-half times his
                                 - 5 -

annual salary.5   Neither the United States nor any of its

individual agencies were contacted or made a part of the

settlement process between Mr. Broedel and SUNY.

     In 1994, Mr. Broedel received two equal payments of

$29,186.25 from SUNY as required by paragraph 2 of the consent

award.   The first payment was dated March 28, 1994, and the

second payment was dated June 8, 1994.    In February of 1995, Mr.

Broedel received a Form 1099-MISC, Miscellaneous Income, from the

State of New York reflecting nonemployee compensation for 1994 of

$29,186.25.

     A dispute arose over whether Mr. Broedel was paid the proper

amount under paragraph 2 of the settlement agreement.    Mr.

Broedel argued that the amount was supposed to be “tax free” and

that the State of New York had improperly coded one of the two

payments required under the settlement agreement, resulting in

the issuance of a Form 1099-MISC to Mr. Broedel.    On August 2,

1995, Mr. Babiskin issued a Supplemental Opinion and Award No. 2

which addressed this dispute.6    The relevant portions of the

opinion provided:



     5
      The parties agree that the amount of $58,372.50 represents
one and one-half times Mr. Broedel’s annual salary. The form and
taxability of the portion of the settlement award attributable to
backpay and attendant benefits are not at issue.
     6
      On Dec. 19, 1994, Mr. Babiskin issued a Supplemental
Opinion and Award addressing an issue not relevant to this
proceeding.
                                - 6 -

          The Consent Award was the complete agreement of
     the parties. The claim that the payments were to be
     “tax free” is without merit. It flies in the face of
     the clear language of the stipulated settlement that
     led to issuance of the Consent Award.

                    *   *   *    *      *     *   *

          Under the terms of the Consent Award, grievant was
     entitled to two equal lump sum payments. The payments
     in the appropriate amounts were made pursuant to the
     Consent Award.

          Furthermore, the “tax status” of the payments must
     be determined by the Internal Revenue Service and the
     Department of Taxation and Finance. I have no
     authority to issue “exemptions” to anyone, let alone
     Mr. Broedel.

          It appears that Mr. Broedel has received every
     dime he is entitled to. If he has a tax liability, that
     is a matter to be worked out between Grievant and the
     tax collectors.

          It is not my function to ignore the clear-cut
     language and interpret same as if it said something
     else. * * *

          By reason of the foregoing, I issue the following

          The payments under * * * the Consent Award
          were not intended to be “tax free.” Grievant
          has not been underpaid. There are no
          additional monies owed to Grievant.

     Before his retirement on December 14, 1993, Mr. Broedel took

out a loan from the New York State and Local Retirement System

(NYRS) against his retirement funds.        On January 6, 1994, the

NYRS sent Mr. Broedel a letter indicating that he had an

outstanding loan balance and that he had the option of repaying

the balance before January 20, 1994.        If he did not repay the

loan, Mr. Broedel’s annual pension would be reduced.        Mr. Broedel
                                - 7 -

did not repay the loan.    In 1995, the NYRS issued Mr. Broedel a

Form 1099-R, Distributions From Pensions, Annuities, Retirement

or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.,

indicating taxable pension income of $13,393.54.    The amount

represented the outstanding loan balance as of Mr. Broedel’s

retirement date.

     Petitioners did not report the $13,393.54 on their 1994 Form

1040, U.S. Individual Income Tax Return.    Petitioners did not

include the $58,372.50 in payments received under paragraph 2 of

the settlement agreement in gross income on their 1994 return.

However, receipt of the two payments totaling $58,372.50 was

fully disclosed on an attached Form 8275, Disclosure Statement,

signed by Mr. Broedel.    In the Form 8275, Mr. Broedel claimed

that the payments were intended to be “a tax-free award” and that

the Form 1099-MISC from the State of New York was erroneously

sent to him.

     Before trial, the parties stipulated an affidavit made by

Mr. Babiskin.   In the affidavit, Mr. Babiskin stated that “The

settlement agreement constituted the complete agreement between

the parties” and “The subject of Mr. Broedel’s health and/or

physical condition was not discussed in * * * [Mr. Babiskin’s]

presence.”
                                 - 8 -



                                OPINION

     Respondent argues that petitioners’ gross income for 1994

must be increased by:   (1) $58,372.50 to reflect the amount

received under paragraph 2 of the settlement agreement, and (2)

$13,393.54 to reflect income from the satisfaction of Mr.

Broedel’s loan from the NYRS.    Petitioners claim that the amount

received under the settlement agreement is excludable from gross

income under section 104(a)(2) and was intended by the parties to

the settlement agreement to be “tax free” and that petitioners

did not realize income in 1994 when Mr. Broedel’s loan from the

NYRS was satisfied.

Taxability of Settlement Proceeds

     Respondent determined that petitioners’ gross income should

be increased by $58,372.50 to account for the amount received

under paragraph 2 of the settlement agreement with SUNY.

Petitioners argue this amount is excludable from income under

section 104(a)(2) because it was paid to settle Mr. Broedel’s

claim against SUNY pursuant to the Americans with Disabilities

Act of 1990 (ADA), Pub. L. 101-336, sec. 2, 104 Stat. 328, for

infliction of emotional distress and to avoid litigation of the

complaint.   Petitioners claim that SUNY had repeatedly harassed

Mr. Broedel and damaged his reputation.   Petitioners also contend
                               - 9 -

that the amount of the settlement was negotiated by the parties

and was intended to be “tax free”.

     Gross income does not include the amount of any damages

received on account of personal injuries or sickness.    See sec.

104(a)(2).7   “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.”   Sec. 1.104-1(c), Income Tax Regs.   In order for

damages to be excludable from gross income under section

104(a)(2), the taxpayer must demonstrate that:   (1) The

underlying cause of action is based upon tort or tort type

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

injuries or sickness.   See Commissioner v. Schleier, 515 U.S.

323, 337 (1995).

     Where amounts are received pursuant to a settlement

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

settlement and not its validity controls whether such amounts are

excludable from gross income under section 104(a)(2).    See Seay

v. Commissioner, 58 T.C. 32, 37 (1972).   “[T]he critical question



     7
      The Small Business Job Protection Act of 1996, Pub. L. 104-
188, sec. 1605(a), 110 Stat. 1838, amended sec. 104(a)(2) to
limit the exclusion, inter alia, to “personal physical injuries
or physical sickness.” The amendment does not apply to damages
collected before the date of its enactment and has no bearing
here.
                              - 10 -

is, in lieu of what was the settlement amount paid?”     Bagley v.

Commissioner, 105 T.C. 396, 406 (1995), affd. 121 F.3d 393 (8th

Cir. 1997).

     The settlement agreement allocated payments for backpay and

attendant benefits and for an amount equal to one and one-half

times Mr. Broedel’s annual salary.     The form and taxability of

the amount allocated to the backpay and attendant benefits are

not at issue.   Because the remaining portion of the settlement

agreement, $58,372.50, is not allocated among petitioners’

various claims, we will examine the nature of each claim in turn.

     Initially, we address petitioners’ claim that Mr. Broedel

suffered injury to his reputation because of harassment by SUNY.

The consent award and the complaint do not refer to any claim by

Mr. Broedel alleging harm to his reputation as the result of

harassment by SUNY, nor is there an allocation to such a claim in

the consent award.   Petitioners have failed to present any

evidence establishing that SUNY paid any portion of the

settlement amount to compensate Mr. Broedel for injury to his

reputation.

     Mr. Broedel’s complaint for relief was based on both State

and Federal law.   The complaint raised allegations under the Age

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

sec. 2, 81 Stat. 602.   Recovery under the ADEA is not based upon

tort or tort type rights.   See Commissioner v. Schleier, supra at
                               - 11 -

336.    Thus, any portion of Mr. Broedel’s claim allocated to

violations under the ADEA would be taxable.

       Respondent concedes that Mr. Broedel’s complaint with the

NYSDHR alleging that he was the victim of age and disability

discrimination prohibited by New York State law is based upon

tort or tort type rights.    However, respondent argues that

petitioners have failed to show that the settlement proceeds were

received on the account of personal injury or sickness.

Petitioners claim that Mr. Broedel had a bona fide claim against

SUNY under the ADA for infliction of emotional distress.

Although the complaint fails to indicate that a claim under the

ADA was being made, it does allege discrimination because of

disability.    To the extent a claim was made under the ADA,

respondent concedes that such a claim sounds in tort.    See, e.g.,

Phillips v. Commissioner, T.C. Memo. 1997-336 (finding that, for

purposes of the motion before the Court, the taxpayer had

established that a claim for relief under the ADA was based on a

tort type cause of action).

       In order to exclude any portion of the $58,372.50 under

section 104(a)(2), petitioners must show that the payments were

received on account of personal injuries or sickness, and they

must establish what portion of the payments, if any, was paid on

account of personal injuries or sickness arising from tort or

tort type rights.    Generally, when a settlement agreement deals
                              - 12 -

with different claims and does not allocate the proceeds to

specific claims, and there is no evidence that a specific claim

was meant to be singled out, the entire amount is considered

taxable.   See Taggi v. United States, 35 F.3d 93, 96 (2d Cir.

1994); Reisman v. Commissioner, T.C. Memo. 2000-173, affd.

without published opinion 248 F.3d 1151 (6th Cir. 2001); Sherman

v. Commissioner, T.C. Memo. 1999-202; Morabito v. Commissioner,

T.C. Memo. 1997-315; Sodoma v. Commissioner, T.C. Memo. 1996-275,

affd. without published opinion 139 F.3d 899 (5th Cir. 1998).

Where a settlement agreement lacks express language stating that

the payment was (or was not) made on account of personal injury,

the most important factor in determining the application of

section 104(a)(2) is the intent of the payor in making the

payment.   See Agar v. Commissioner, 290 F.2d 283, 284 (2d Cir.

1961), affg. per 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).

     On the day of the hearing regarding the notices of

discipline, Mr. Broedel, Mr. Lesniak, and Mr. Patterson met with

Mr. Hasselbach and Mr. Panebianco, SUNY’s authorizing official

for the settlement agreement, to discuss the possibility of a

settlement.   As a result of the meeting, Mr. Broedel agreed to

retire immediately in exchange for an amount equal to one and

one-half times his annual salary.   The parties then met with Mr.
                              - 13 -

Babiskin, and the terms of the settlement agreement were written

out by him and incorporated into a consent award.    The consent

award refers to Mr. Broedel’s early retirement, the withdrawal of

disciplinary actions against Mr. Broedel, the withdrawal of Mr.

Broedel’s complaints, and a general release to SUNY of “any and

all liability arising out of and/or in connection with * * * [Mr.

Broedel’s] employment with * * * [SUNY]”.   The consent award does

not refer to any personal injuries or sickness suffered by Mr.

Broedel, nor does it make any allocation of the settlement

payments among Mr. Broedel’s various claims.    Mr. Panebianco

testified that SUNY’s only concern in reaching a settlement with

Mr. Broedel was the payment of one and one-half times Mr.

Broedel’s annual salary for him to retire and withdraw his

complaints.   Mr. Lesniak, Mr. Broedel’s union steward, admitted

that the payments were made so that Mr. Broedel would retire.

Mr. Broedel testified that during the negotiations there was no

allocation of the settlement amount among his different claims.

Finally, Mr. Babiskin’s affidavit states that the settlement

agreement constituted the complete agreement between the parties

and that the subject of Mr. Broedel’s health and/or physical

condition was not discussed in Mr. Babiskin’s presence.

Petitioners have failed to show that SUNY intended any portion of

the payments to compensate Mr. Broedel for personal injuries or

sickness based upon tort or tort type rights.
                              - 14 -

     Petitioners’ main argument is that the payments to Mr.

Broedel were intended by the parties to be “tax free”.   Mr.

Broedel and Mr. Lesniak both testified that it was their

understanding that the amount received under paragraph 2 of the

settlement agreement was “tax free”.    Petitioners also presented

substantial evidence in the form of letters written by Mr.

Broedel and Mr. Lesniak to several State and Federal officials in

which they maintain that the settlement agreement required Mr.

Broedel to receive “tax free” payments.

     The consent award does not provide that the payments were

intended to be “tax free”.   Additionally, the testimony of Mr.

Panebianco and the Supplemental Opinion and Award No. 2 rendered

by Mr. Babiskin both indicate that the condition that the

payments be “tax free” was not part of the settlement agreement.

Petitioners also argue that the Form 1099-MISC in the amount of

$29,186.25 was issued as the result of improper coding and that

if the payments had been intended to be taxable, then petitioners

would have received a second Form 1099-MISC reflecting the other

payment.   However, it is just as possible that a second Form

1099-MISC was not sent by the State of New York because error

caused only one payment to be coded as taxable when both payments

were intended to be coded as taxable.

     We note that even if the parties intended the payments to be

“tax free”, this does not necessarily mean that they are excluded
                                - 15 -

from gross income under section 104(a)(2).    The relevant inquiry

is whether the claim is based upon tort or tort type rights and

the damages received are on account of personal injuries or

sickness.    See Commissioner v. Schleier, 515 U.S. at 337.

Furthermore, neither the Internal Revenue Service nor any other

agency of the United States consented to a settlement agreement

awarding Mr. Broedel “tax free” payments.

     The amount paid to Mr. Broedel under the settlement

agreement was equal to one and one-half times his annual salary.

The evidence in the record indicates that SUNY’s intent in

settling with Mr. Broedel was to induce his retirement and effect

the withdrawal of any and all complaints against SUNY.    As we

stated earlier, Mr. Broedel’s complaint filed with the NYSDHR

included various claims.    Not all of these claims were based upon

tort or tort type rights.    The settlement agreement did not

allocate the payments among his claims, and petitioners have

failed to establish what portion, if any, was paid on account of

personal injuries or sickness arising from tort or tort type

rights.     Indeed, the fact that the amount of $58,372.50 was based

on the amount Mr. Broedel would have received had he continued

working another year and a half points in the direction of

payment for reasons other than personal injury or sickness.     See,

e.g., Bland v. Commissioner, T.C. Memo. 2000-98; Morabito v.

Commissioner, supra; Sodoma v. Commissioner, supra; Webb v.
                                - 16 -

Commissioner, T.C. Memo. 1996-50.    Accordingly, we hold that the

entire $58,372.50 is includable in petitioners’ 1994 gross

income.

Income From Satisfaction of Mr. Broedel’s Loan Against His
Retirement Account

     Respondent argues that petitioners received income in 1994

because of the satisfaction of Mr. Broedel’s outstanding loan

against his NYRS retirement account.     Petitioners argue they did

not realize income because the NYRS deducted the loan amount from

Mr. Broedel’s retirement account when it was not repaid.

     At the time of his retirement, Mr. Broedel had an

outstanding loan against his retirement funds.    Mr. Broedel was

given the option of repaying the loan.    Mr. Broedel chose not to

repay the loan, and the NYRS apparently satisfied the loan by

deducting the loan balance from Mr. Broedel’s retirement account

balance.    The NYRS issued Mr. Broedel a Form 1099-R for 1994

reflecting a taxable amount of $13,393.54, representing the

outstanding loan balance.    Petitioners did not report this amount

on their 1994 tax return.    Petitioners did not present testimony

at trial on this issue, and they did not argue this issue on

brief.    Petitioners addressed this issue only in their petition

and trial memorandum, in which they claim that the loan amount

was “repaid” because the NYRS deducted the loan amount from Mr.

Broedel’s retirement account.
                              - 17 -

     Section 61(a) defines gross income as “all income from

whatever source derived”.   Petitioners offered no evidence or

argument to support any claim that the use of funds from Mr.

Broedel’s NYRS retirement account to satisfy his loan was not

taxable income.   On the basis of the evidence before us, we hold

that petitioners realized $13,393.54.



                                    Decision will be entered

                               for respondent.
