                       T.C. Memo. 1996-536



                     UNITED STATES TAX COURT



               BEVERLY T. RUTT-HAHN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12947-94.                   Filed December 5, 1996.



     Beverly T. Rutt-Hahn, pro se.

     Katherine Holmes Ankeny, for respondent.



                       MEMORANDUM OPINION

     PAJAK, Special Trial Judge:     This case was heard pursuant to

section 7443A(b)(3) of the Code and Rules 180, 181, and 182.

Unless otherwise indicated, all section references are to the

Internal Revenue Code in effect for the year in issue.    All Rule

references are to the Tax Court Rules of Practice and Procedure.
                                - 2 -

     Respondent determined a deficiency in petitioner's 1991

Federal income tax in the amount of $1,483.    The issues we must

decide are:    (1) Whether petitioner may exclude from gross income

under section 104 amounts received from her former employer

pursuant to a settlement agreement; and (2) whether petitioner's

legal expenses are properly deductible as a miscellaneous

itemized deduction.

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

Petitioner resided in Paradise Valley, Arizona, when her petition

was filed.

     For clarity and convenience, our findings of fact and

opinion have been combined.

     Petitioner Beverly Rutt-Hahn (petitioner) had been employed

by the United States Postal Service (Postal Service) for a number

of years.    As of 1983, petitioner was an EAS-15 Supervisor of

Mails and Delivery at the mail sectional center in Phoenix,

Arizona.    In July 1984, petitioner applied for disability

retirement from the Postal Service, and her application was

approved.    Thereafter, she began to receive civil service

retirement benefits in the form of a disability retirement

annuity.

     In October 1987, petitioner filed a lawsuit against the

Postal Service in the United States District Court for the

District of Arizona.    In her "Complaint For Damages And Equitable
                                - 3 -

Relief", petitioner alleged that the Postal Service, et al.,

discriminated against her from "1976 to the present" based on her

sex, age (then 48), handicap (heart disease; stress-induced

illness), and in retaliation for having filed prior Equal

Employment Opportunity complaints.      Petitioner specifically

alleged, among other things, that:

          3.2 Defendants pursued a policy and practice of
     failing to provide female employees, and older females
     particularly, with equal opportunities for "details"
     (temporary promotions) and training in the letter
     carrier, supervisory and station management workforce
     of the U.S. Postal Service.

                    *   *   *    *      *   *   *

          3.6 Defendants' policy and practice of providing
     certain employees with "details" (temporary promotions)
     to higher EAS levels, which experience defendants then
     consider essential or desirable for promotion into
     higher level positions has a disparate impact on
     females and particularly those aged 40 and older.

          3.7 Defendants treated plaintiff differently from
     similarly situated male employees and employees under
     age 40 in that:

               (a) Plaintiff was held at level EAS-15,
     where she performed successfully, during all relevant
     times herein, but was not selected for promotions into
     positions for which she applied at levels EAS-16
     through 20 from 1976 through 1984.

               (b) Plaintiff was denied higher level
     training details, denied equal access to carrier
     supervisory assignments and denied officer-in-charge
     assignments by defendants' agents.

               (c) Plaintiff's lack of higher level
     training details, officer-in-charge assignments and/or
     lack of experience in carrier supervision were used as
     reasons and/or pretexts for denial of promotion.
                                - 4 -

               (d) Plaintiff was unfavorably evaluated by
     her supervisors and unfavorable evaluations were
     maintained in her personnel files.

               (e) Plaintiff was issued discriminatory
     directives by her supervisors including letters of
     deficiency, warning, instruction and concern.

          3.8 Plaintiff was coerced into withdrawing a
     complaint of sex discrimination filed in 1979 by
     statements from the Director of Employee and Labor
     Relations that her complaint would harm her career
     opportunities.

                    *   *   *    *      *   *   *

          3.11 Defendants' discriminating letters and
     evaluations in 1981 created a chilling effect of such
     proportion that it was fruitless to apply for
     promotions for which she was qualified.

          3.12 Defendants treated plaintiff differently
     from similarly situated employees by failing to
     accommodate plaintiff's handicapping conditions of
     heart disease and stress induced illness from November
     1983 to the present * * *.

          3.13 As a result of filing complaints of
     violations of her equal employment opportunity,
     plaintiff was denied training details and assignments,
     denied promotions, given unfavorable evaluations,
     discouraged from applying for promotions and coerced
     into withdrawing a complaint alleging sex
     discrimination.

Petitioner based her discrimination allegations on the following:

          1.1 [Title VII of] The Civil Rights Act of 1964
     as amended, 42 USC Sec. 2000 e-16(c);

               The Age Discrimination in Employment Act, as
     amended, 29 USC Sec. 621, et seq.;

               The Civil Rights Attorneys Fee Act of 1976,
     as amended, 42 USC Sec. 1988;

               39 USC Sec. 409, and application thereof by
     the courts, permitting judicial review of final
     decisions of the U.S. Postal Service;
                               - 5 -

Petitioner's complaint requested, in relevant part, the following

relief:

     (4)   Equitable relief to make [plaintiff] whole, including:

          (a) Back pay and retroactive promotion as
     justified by the evidence * * *.

          (b) If plaintiff cannot be reinstated because of
     the discriminatory work environment, payment for
     training and education needed to place plaintiff in
     work consistent with her handicap, at a level to earn
     comparable wages outside the Postal Service to those
     she could have earned but for the discrimination.

          (c) Front pay and benefits until plaintiff
     obtains comparable employment described in (b) above,
     or until early retirement age if she cannot return to
     work because of the residual effects of the
     discrimination.

          (d) Recomputation of retirement benefits to
     reflect the retroactive promotions and pay.

          (e) Publication of notices to all postal
     employees as to plaintiff's quality work performance
     and prevailing on issues of discrimination.

          (f) Reasonable attorney fees and costs of suit
     for the administrative and judicial proceedings in
     these cases.

          (g) Such other and further relief as the court
     may award.

     Petitioner's "First Amended Complaint For Damages And

Equitable Relief", filed in January 1988, was identical with

respect to the above quoted language and presented no relevant

changes.

     Petitioner and the Postal Service settled petitioner's

lawsuit and entered into a written settlement agreement (the
                                 - 6 -

agreement) on August 22, 1991.    The agreement provided that the

parties,

     having agreed to compromise and settle any and all
     claims, as set forth below, including, without
     limitation, claims for injunctive relief, back pay,
     damages, retroactive promotions, attorneys' fees, and
     costs, that the said plaintiff may have against the
     defendant, and/or the United States Postal Service,
     and/or any former or current officers, employees and/or
     agents of the United States Postal Service, it is
     agreed by the parties as follows:

          1.   The United States Postal Service agrees to
     pay to plaintiff Beverly T. Rutt-Hahn the sum of
     $75,000. It is understood and agreed that plaintiff
     will be responsible for the payment of any taxes with
     respect to this sum.

          2.   The United States Postal Service agrees to
     adjust the records of plaintiff Beverly T. Rutt-Hahn to
     reflect a promotion to the maximum of an EAS-20 as of
     January 10, 1981 through the effective date of her
     retirement. This information will be transmitted by
     the Postal Service to the Office of Personnel
     Management (OPM) which will then be responsible for
     recalculating and paying to plaintiff whatever
     additional monies may be due and owing to her, and any
     adjustments to her retirement, as a result of the EAS-
     20 promotion information supplied by the Postal Service
     adjusting plaintiff's records. * * * In addition, the
     Postal Service agrees to pay to OPM the requisite
     retirement contributions to the Civil Service
     Retirement and Disability Fund on its behalf and on
     behalf of plaintiff, necessary for OPM to process the
     necessary adjustments described above. The parties
     agree that the adjustment of plaintiff's records is not
     intended to entitle plaintiff to any benefit other than
     those monies and retirement adjustments described above
     to be determined by OPM. The actions of the United
     States Postal Service as set forth in paragraphs one
     (1) and two (2) above are accepted by plaintiff and her
     counsel as fully discharging, without limitation, all
     claims of plaintiff and her counsel including but not
     limited to backpay, damages, attorneys' fees and costs.

          3.   Upon completion by the Postal Service of the
     step set forth in paragraph one (1), above, and the
                              - 7 -

     Postal Service's transmission of information to OPM as
     set forth in paragraph two (2), above, and assurance
     from OPM of its approval and further action, plaintiff
     agrees to stipulate to a dismissal, with prejudice, of
     the above-styled litigation, namely Beverly T. Rutt-
     Hahn v. Anthony M. Frank, Postmaster General of the
     United States Postal Service, No. CIV. 87-1619 PHX WPC.
     In addition, after execution of this Settlement
     Agreement and OPM's approval, plaintiff also agrees to
     withdraw, with prejudice, her claim for attorneys'
     fees, costs and other relief in the pending Equal
     Employment Opportunity Commission, Office of Federal
     Operations' appeal * * *.

          4.   Each party shall bear its own respective
     costs and counsel fees.

          5.   By this Settlement Agreement plaintiff
     waives, releases and abandons any and all claims
     against the defendant, the United States Postal
     Service, its officers, agents and/or employees, whether
     past or present, alleged either in the above-entitled
     litigations in paragraph three (3) or in any EEO
     complaint or litigation presently filed or pending in
     any forum whatsoever, as well as any and all other
     claims arising out of the events of said litigations
     and other EEO complaints, and agrees to accept those
     United States Postal Service actions outlined in
     paragraphs one (1) and two (2) in full and complete
     settlement and satisfaction thereof. Plaintiff also
     waives, releases and abandons any and all rights or
     claims she may have or may allege to have to re-
     employment with the Postal Service either now or in the
     future. Plaintiff agrees that this Settlement
     Agreement constitutes res judicata of all of her claims
     above described and that she will not raise, litigate
     or relitigate any such claims in any other proceeding,
     whether judicial or administrative.

     In accordance with the agreement, the Postal Service issued

petitioner a check for $75,000 on September 30, 1991.   By a

second check dated December 11, 1991, the Postal Service paid

petitioner $23,106.64 as back payment of her increased retirement
                                - 8 -

benefits.    There is no dispute that petitioner received these

payments in 1991.

     On her 1991 Federal income tax return, petitioner subtracted

$41,063, which represents the legal expenses she incurred in

prosecuting her action against the Postal Service, from the

$75,000 payment.    She then reported the difference of $33,937 as

"Other income" on line 22 of her return.    She reported $42,719 of

pension and annuity income, which included the $23,106.64 of

increased retirement benefits received for her retroactive

promotion.    Petitioner also reported wages she received from her

employment with Specialty Graphics in 1991.

     Respondent determined that petitioner was not entitled to

exclude the $41,063 in legal expenses from income.    Respondent

further determined that petitioner's legal expenses were

deductible as a miscellaneous itemized deduction.

     Petitioner now argues that, under section 104(a)(2), neither

the $75,000 payment nor the increased retirement benefits are

taxable income.    Petitioner bears the burden to prove she is

entitled to exclude the payments she received in 1991 from

income.   Rule 142(a).

     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 must be narrowly
                               - 9 -

construed.   Commissioner v. Schleier, 515 U.S. ___, 115 S.Ct.

2159, 2163 (1995).

     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 "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 tort type rights; and (2) on account

of personal injuries or sickness.      Commissioner v. Schleier, 515

U.S. at ___, 115 S. Ct. at 2166-2167.

     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 under

section 104(a)(2).   United States v. Burke, 504 U.S. 229, 237

(1992); Robinson v. Commissioner, 102 T.C. 116, 126 (1994), affd.

in part, revd. in part 70 F.3d 34 (5th Cir. 1995).     The "critical

question is, in lieu of what was the settlement amount paid?"

Bagley v. Commissioner, 105 T.C. 396, 406 (1995).     Determination

of the nature of the claim is factual.     The most important
                              - 10 -

element is the intent of the payor.    Robinson v. Commissioner,

supra at 127.

     As enumerated in the settlement agreement, the Postal

Service agreed to pay petitioner $75,000 to settle petitioner's

claims.   In her initial complaint and her amended complaint,

petitioner based her claims on Title VII of the Civil Rights Act

of 1964 (CRA of 1964), Pub. L. 88-352, 78 Stat. 253 (current

version at 42 U.S.C. sec. 2000e (1994)), and on the 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)).

     The Supreme Court has held that recoveries received for the

settlement of claims based on Title VII of the CRA of 1964 are

not excludable from gross income under section 104(a)(2).     United

States v. Burke, supra.   The Supreme Court has also held that

recoveries received for claims based on the ADEA are not

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

Commissioner v. Schleier, supra.   In both cases, the Supreme

Court concluded that because the statutes in question did not

create remedies for personal injuries, the causes of action

invoking those statutes were not based upon tort or tort-type

rights.   United States v. Burke, supra at 241-242; Commissioner

v. Schleier, 515 U.S. at ___, 115 S. Ct. at 2167.   With regard to

both Title VII and the ADEA, the Supreme Court stated:

          Like the pre-1991 version of Title VII, the ADEA
     provides no compensation "for any of the other
     traditional harms associated with personal injury."
                              - 11 -

     Monetary remedies under the ADEA are limited to back
     wages, which are clearly of an "economic character,"
     and liquidated damages, which we have already noted
     serve no compensatory function. Thus, though this is a
     closer case than Burke, we conclude that a recovery
     under the ADEA is not one that is "based upon tort or
     tort type rights."

Commissioner v. Schleier, 515 U.S. at ___, 115 S. Ct. at 2167.

Consequently, petitioner is not entitled to exclude from income

the $75,000 she received from the Postal Service.

     Petitioner also received $23,106.64 from the Office of

Personnel Management reflecting changes to her disability

retirement benefits.   Petitioner appears to make two basic

arguments for exclusion of the disability retirement benefits.

First, she considers it to be part of the total settlement she

received from the Postal Service, and therefore excludable under

section 104(a)(2).   For the reasons stated above, the increased

retirement benefits are not damages received on account of

personal injuries or sickness within the meaning of section

104(a)(2).

     Petitioner also cites section 104(a)(4) and argues that

gross income does not include a "disability annuity", and

therefore the payment in question is not income.

     In the settlement agreement, the Postal Service agreed to

adjust petitioner's records to reflect a promotion, and then

transmit the information to the Office of Personnel Management,

which would then recalculate and pay to petitioner any additional

retirement benefits due based on her retroactive promotion.    As
                              - 12 -

noted in the settlement agreement, the retirement benefits come

from the Civil Service Retirement and Disability Fund.    Though

not explicit in the record, we assume petitioner was a

participant in the Civil Service Retirement System (CSRS), 5

U.S.C. section 8331 et seq., a mandatory pension plan for Federal

employees hired prior to January 1, 1984.    Distributions from the

CSRS are subject to taxation under section 72 pursuant to section

402(a).   CSRS is a plan that meets the requirements of section

401(a).   The law is well established that section 72 governs the

taxation of distributions received pursuant to the CSRS.    Malbon

v. United States, 43 F.3d 466 (9th Cir. 1994).

     The $23,106.64 of retirement benefits petitioner received

came from her Federal pension plan.    Section 61 specifically

provides that gross income includes "pensions".    Sec. 61(a)(11).

Section 104(a)(4) excludes from gross income:

     amounts received as a pension, annuity, or similar
     allowance for personal injuries or sickness resulting
     from active service in the armed forces * * * Geodetic
     Survey or the Public Health Service, or as a disability
     annuity payable under the provisions of section 808 of
     the Foreign Service Act of 1980 * * *.

It is obvious that section 104(a)(4) does not apply to the facts

in this case.   Haar v. Commissioner, 78 T.C. 864 (1982), affd.

per curiam 709 F.2d 1206 (8th Cir. 1983); Bagnell v.

Commissioner, T.C. Memo. 1993-378.
                               - 13 -

     Based on the foregoing, we find that petitioner is not

entitled to exclude from gross income the increased retirement

benefits she received in 1991.

     The issue of the deductibility of the $41,063 legal expenses

is resolved by considering the context in which the expenses were

incurred.    A taxpayer is permitted to deduct legal fees under

section 162 or section 212, provided that the fees have the

necessary connection to profit-seeking activity.    Pursuant to

section 62(a), legal fees may be deducted from gross income as a

business expense under section 162 if the fees are directly

related to the taxpayer's trade or business.    If the taxpayer's

trade or business is that of being an employee, however, then the

legal expenses will be subject to the limitation of section

62(a)(1) and will be treated as a miscellaneous itemized

deduction pursuant to section 67.

     Petitioner's lawsuit against the Postal Service arose from

and was related to her prior employment with the Postal Service.

Thus, her legal expenses originated from and were related to her

trade or business of being an employee.    Consequently,

petitioner's legal expenses are a miscellaneous itemized

deduction.    We sustain respondent's determination on this issue.

     To reflect the foregoing,

                                          Decision will be entered

                                     for respondent.
