                  T.C. Summary Opinion 2001-73



                     UNITED STATES TAX COURT



                KEVIN WADE HAMBLIN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 7617-99S.                      Filed May 21, 2001.


     Kevin Wade Hamblin, pro se.

     Sara J. Barkley, for respondent.



     COUVILLION, Special Trial Judge:   This case was heard

pursuant to section 7463 in effect when the petition was filed.1

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

and this opinion should not be cited as authority.

     Respondent determined a deficiency of $6,137 in petitioner's



     1
          Unless otherwise indicated, section references
hereafter are to the Internal Revenue Code in effect for the year
at issue. All Rule references are to the Tax Court Rules of
Practice and Procedure.
                               - 2 -


Federal income tax for 1995.

     The issue for decision is whether certain amounts received

by petitioner from his former employer during 1995 in connection

with the settlement of a class action against his former employer

are excludable from gross income under section 104(a)(2).   In his

petition, petitioner alleged "my ex-wife filed for the year of

1995 and I do not remember signing a 1040 for that tax season, so

I cannot attest to its correctness, nor should I be held

accountable if it is incorrect as to her income."   At trial,

petitioner filed a trial memorandum in which he stated that his

former spouse, Carol L. Fuhr Hamblin (Mrs. Hamblin), falsely

reported on their joint return income from a trade or business

activity conducted by her in the amount of $5,670, and the reason

for reporting such income was solely for the purpose of claiming

an earned income credit under section 32.   With respect to the

tax on that income, petitioner claims relief from joint liability

under section 6015.   Respondent agrees, while not making any

concession, that the issue is appropriate but cannot now be

considered by the Court for the reason that respondent had no

knowledge prior to trial that petitioner intended to claim relief

from joint liability, and, accordingly, petitioner's former

spouse was not provided notice as required by section 6015(e)(4).
                                - 3 -


See also King v. Commissioner, 115 T.C. 118 (2000);2 Interim Rule

325.

       Some of the facts were stipulated.    Those facts, with the

annexed exhibits, are so found and are incorporated herein by

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

legal resident of Canon City, Colorado.

       Petitioner was an employee of PayLess Drug Stores Northwest,

Inc. (PayLess), in Colorado from sometime during 1991 until June

23, 1992.    He worked in several different positions, including

that of floor supervisor, although his assignments varied,

ranging from stocking shelves to the supervision of employees.

Shortly after his employment began with PayLess, petitioner

realized that his employer was overly demanding.      He and other

employees were required to work from 80 to 100 hours per week, at

least 6 and sometimes 7 days per week.      He found the work

overwhelming and finally realized he could no longer bear the



       2
          In the notice of deficiency, respondent disallowed the
earned income credit of $2,961 claimed on petitioner's joint
return for 1995 for the reason that the inclusion of petitioner's
class action award in income exceeded the earned income amount as
provided in sec. 32(a)(2) and (b). If the Court sustains
respondent on the class action income issue, respondent's
adjustment disallowing the earned income credit would likewise be
sustained; however, the question of whether petitioner is
entitled to relief from joint liability under sec. 6015 with
respect to the trade or business income attributable to his
former spouse would remain. Additional information regarding
petitioner's 1995 joint return relative to this issue is provided
later in the body of the opinion.
                               - 4 -


emotional and physical strains of the job.    He left the

employment with PayLess in June 1992 and went into real estate.

     On March 16, 1993, an action was filed in the U.S. District

Court for the District of Idaho against PayLess by four of its

former employees for themselves and on behalf of other present

and former employees of PayLess.    The complaint alleged that the

purpose of the action was to recover on behalf of the class of

employees unpaid overtime compensation, liquidated damages,

attorney's fees, and costs under section 16(b) of the Fair Labor

Standards Act of 1938, ch. 676, 52 Stat. 1069, currently codified

at 29 U.S.C. secs. 201-209 (1994).     Petitioner was not one of the

plaintiffs instituting the action; however, petitioner qualified

for participation as a member of the class of employees for whom

the action was filed.   Petitioner never elected to be excluded

from the class, nor did petitioner ever claim or institute any

separate action against PayLess.    The class action did not

proceed to trial but was settled.    PayLess agreed to pay $5

million for the benefit of all qualifying members of the class,

including petitioner.   As part of the settlement, the plaintiffs

in the class action executed a written Settlement Agreement and

Release (the Settlement Agreement) effective January 25, 1995, in

consideration for payment of the $5 million by PayLess.     The

Settlement Agreement included a release by the plaintiffs of

PayLess that was embodied as section 3 and provided in pertinent
                              - 5 -


part:


     the * * * Plaintiffs * * * hereby release and discharge
     PayLess * * * from all actions, claims, or demands for
     damages, liabilities, costs, or expenses, which the
     Plaintiffs * * * have against PayLess on account of, or in
     any way arising out of the claims that were asserted or that
     could have been asserted in the Lawsuit by the Plaintiffs *
     * * including, but not limited to, claims for personal
     injuries, intentional infliction of emotional distress,
     negligent infliction of emotional distress, and from all
     known claims, whether based on tort, statute or contract,
     which are based in whole or in part, or arise out of, or in
     any way relate to: (1) the Lawsuit; and (2) anything done or
     allegedly done by PayLess arising out of, or in conjunction
     with or relating to, the employment of any and/or all
     Plaintiffs * * * by PayLess.


     The Settlement Agreement additionally included section 8,

entitled Liability Denial and Basis For Settlement, which

provided:


          PayLess denies any liability on its part and enters
     into this agreement solely to avoid litigation and to buy
     its peace. All Settlement Proceeds are paid to Plaintiffs
     on account of personal injuries. This Settlement Agreement
     and the releases contained herein settle and resolve all
     claims which have to this point been contested and denied by
     the parties, as well as all other claims released by
     paragraphs 3 and 4 of this Settlement Agreement. None of
     the provisions of this Settlement Agreement and nothing
     contained in this Settlement Agreement shall be construed as
     an admission of any liability whatsoever by any party hereto
     to any other party hereto. [Emphasis added.]


     As a member of the class of former employees of PayLess,

petitioner, during 1995, received $40,611.46, from which $14,023

was deducted for attorney's fees and costs, for a net amount of
                               - 6 -


$26,588.46.   The amount recovered included back pay, liquidated

damages, an amount for participating as a member of the class,

and another amount for testifying in a deposition.   The parties

did not provide an itemization of these various amounts except

that the notice of deficiency listed $24,210 as liquidated

damages and $16,401 as wages or back pay.

     As part of the settlement, petitioner executed an Individual

Certification and Release in favor of PayLess wherein he

acknowledged receipt of documents regarding settlement of the

class action, acknowledged receiving a copy of the Settlement

Agreement that was incorporated by reference as part of his

release, expressly affirmed "the authority of the named

Plaintiffs to release my claims and settle the Lawsuit", and

individually released PayLess in paragraph 8 of the release that

provided, in pertinent part:


          In exchange for the payment of the amount * * * [to
     petitioner] I hereby release and discharge PayLess * * *
     from all actions, claims, or demands for damages,
     liabilities, costs, or expenses, which the Plaintiffs,
     individually or collectively, have against PayLess on
     account of, or in any way arising out [of] the claims that
     were asserted or that could have been asserted in the
     Lawsuit by the Plaintiffs, which Lawsuit is hereby
     acknowledged as not fully plead, further including, but not
     limited to, claims for personal injuries, intentional
     infliction of emotional distress, negligent infliction of
     emotional distress, and from all known claims, whether based
     on tort, statute or contract, which are based in whole or in
     part, or arise out of, or in any way relate to: (1) the
     Lawsuit; and (2) anything done or allegedly done by PayLess
     arising out of, or in conjunction with or relating to, the
                               - 7 -


     employment of any and/or all Plaintiffs prior to November 1,
     1992 by PayLess. [Emphasis added.]


     Petitioner and his then wife, Mrs. Hamblin, filed a joint

Federal income tax return for 1995.    The amount received by

petitioner from PayLess was not included as income on the return.

At the time the return was filed in February 1996, petitioner was

incarcerated.   The return was not signed by petitioner; however,

Mrs. Hamblin signed the return on his behalf pursuant to a

General Durable Power of Attorney petitioner had previously

executed appointing Mrs. Hamblin as his agent with authority to

perform such acts on his behalf.   The items of income reported on

the return are as follows:


          Wages and salaries                   $2,960
          Taxable interest income                  75
          Schedule C business income            5,670
          Other income: House cleaning            300
            Total                              $9,005


The earned income reported on the return was attributable solely

to Mrs. Hamblin and included Schedule C income from a real estate

sales activity conducted by Mrs. Hamblin under the business name

of Heritage Realtors.   The return also included an Internal

Revenue Service form, Schedule EIC, Earned Income Credit, which

listed two qualifying children.    The amount of the earned income

credit claimed was $2,961.   Petitioner and Mrs. Hamblin separated

in 1995 and were divorced in 1999.
                               - 8 -


     Respondent issued one notice of deficiency to petitioner and

Mrs. Hamblin and determined that the $40,611 gross amount

received by petitioner from PayLess constituted gross income, and

$13,039 of the attorney's fees and costs related to the PayLess

award was allowable as an itemized deduction.3     Because the

standard deduction claimed on the return was less than the

allowed itemized deduction, respondent substituted the $13,039 in

attorney's fees and costs for the standard deduction claimed on

the return.4   The $2,961 in earned income credit on the return

was also disallowed in full.   See supra note 2.

     Petitioner filed a timely petition in this Court.     Mrs.

Hamblin did not petition this Court.

     Petitioner contends that the amount he received in the

settlement represented damages for the physical and mental strain

he suffered in the undue hours and days he was required to work

for PayLess, which he could no longer endure and resulted in his

leaving the employment.   More specifically, when questioned at

trial as to what was the personal injury he sustained, petitioner


     3
          The allowed amount presumably consists of the $14,023
withheld from petitioner's award less 2 percent of adjusted gross
income that is not allowable under sec. 67(a).
     4
          Petitioner has not challenged respondent's inclusion of
the $14,023 in attorney's fees in gross income and allowance of
that amount as an itemized deduction, reduced by the sec. 67(a)
limitation. See Miller v. Commissioner, T.C. Memo. 2001-55;
Benci-Woodward v. Commissioner, 219 F.3d 941 (9th Cir. 2000),
affg. T.C. Memo. 1998-395.
                              - 9 -


answered:


     It was fatigue, stress, headaches, the fact that I was going
     around like a zombie, the fact that I had –- that I was
     making bad decisions. There's –- that pretty much covers
     everything, but it was such a tremendous amount of stress
     that I was having a hard time dealing with life, and it was
     manifesting itself.


Petitioner also contends that his physical and emotional injuries

were a contributing cause of his subsequent commission of a

felony for which he was sentenced to prison.

     No action was ever instituted by petitioner against PayLess

for the above injuries petitioner described, nor do any of the

settlement documents between PayLess and its former employees

address any specific injury to any of the former employees who

instituted the action, including petitioner as a member of the

class.

     Section 104(a)(2) provides that gross income does not

include "the amount of any damages received (whether by suit or

agreement* * *) on account of personal injuries or sickness".

Under section 1.104-1(c), Income Tax Regs., "damages" means a

recovery "based upon tort or tort type rights".   See also

Commissioner v. Schleier, 515 U.S. 323 (1995).    While personal

injuries, under section 104(a)(2), may generally include both

physical as well as nonphysical emotional injuries, such as "pain

and suffering, emotional distress, harm to reputation, or other
                              - 10 -


consequential damages (e.g., a ruined credit rating)", the

Supreme Court has distinguished such personal injuries from

"legal injuries of an economic character" such as those arising

out of the unlawful deprivation of the opportunity to earn wages

through a wrongful termination.     United States v. Burke, 504 U.S.

229, 239, 245 (1992).   Damages received for lost wages in

connection with the settlement of economic rights, such as those

arising out of a breach of contract, are not excludable from

income under section 104(a)(2).   See Robinson v. Commissioner,

102 T.C. 116, 126 (1994), affd. in part, revd. in part on another

issue 70 F.3d 34 (5th Cir. 1995).

     Section 1.104-1(c), Income Tax Regs., provides:    "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, in

order to exclude damages from gross income pursuant to section

104(a)(2), the taxpayer must prove:    (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".   Commissioner v. Schleier, supra at 336-337.

     Where amounts 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 from
                              - 11 -


gross income under section 104(a)(2).   See United States v.

Burke, supra at 237.   The crucial question 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).

Determining the nature of the claim is a factual inquiry.   See

Robinson v. Commissioner, supra at 127.

     Here, the complaint in the class action was exclusively for

recovery of "overtime compensation, liquidated damages, attorney

fees and costs" under the Fair Labor Standards Act of 1938.

Nowhere in the complaint or in the Settlement Agreement is there

any reference to or any indication that the recovery included

damages for physical or mental injuries.   Moreover, the record

satisfies the Court that petitioner's claim to physical and

mental injuries was not called to the attention of PayLess or its

attorneys in connection with the class action.   Since there was

no claim made for such injuries by petitioner, the rhetorical

question posed in Bagley v. Commissioner, supra, is that whatever

the settlement was for, it certainly was not for personal

injuries attributable to the injuries petitioner claims.5

Moreover, the general language relied on by petitioner in the

Settlement Agreement that "all settlement proceeds are paid to

plaintiffs on account of personal injuries" is inconsistent with


     5
          Indeed, some of the injuries petitioner complains of
occurred long after his employment with PayLess.
                               - 12 -


the other provisions of the agreement that quite clearly indicate

and establish that the settlement was intended to satisfy the

claims made in the class action.   Such language relied on by

petitioner in the Settlement Agreement, therefore, can be

ignored.    See Peaco v. Commissioner, T.C. Memo. 2000-122.      An

express allocation, such as petitioner relies on, may be

disregarded if the facts and circumstances surrounding a payment,

such as exists in this case, indicate that the payment was

intended by the parties to be for a different purpose.     See

Bagley v. Commissioner, supra; Robinson v. Commissioner, supra;

Threlkeld v. Commissioner, 87 T.C. 1294, 1307 (1986), affd. 848

F.2d 81 (6th Cir. 1988); Burditt v. Commissioner, T.C. Memo.

1999-117.    The Court, therefore, finds that the amounts awarded

to petitioner were for back pay and liquidated damages under the

Fair Labor Standards Act pursuant to the class action initiated

by the former employees of PayLess.     As such, the amount paid to

petitioner constituted gross income, and such amount is not

excludable under section 104(a)(2).     See Commissioner v.

Schleier, supra.    Respondent, therefore, is sustained.

     Reviewed and adopted as the report of the Small Tax Case

Division.    In order to present petitioner's claim to relief from
                             - 13 -


joint liability under section 6015 as an issue before this Court,

which includes the right of intervention by petitioner's former

spouse,



                                        An appropriate order

                                   will be issued.
