                        T.C. Memo. 2005-223



                      UNITED STATES TAX COURT



         CHARLES E. AND NOEL K. BRADLEY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 19074-02.           Filed September 26, 2005.


          Ps excluded $12 million of a $76 million
     settlement from gross income for the 1995 taxable year
     pursuant to sec. 104 (a)(2), I.R.C. R determined the
     $12 million was not excludable.

          Held: Ps are not entitled to exclude the $12
     million settlement amount from gross income.


     Charles E. and Noel K. Bradley, pro sese.

     Robert E. Marum, for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION

     WHERRY, Judge:   Respondent determined a deficiency in

petitioners’ Federal income tax for the 1995 taxable year in the

amount of $4,676,578 and a penalty pursuant to section 6662(a) in
                                - 2 -

the amount of $914,025.1    After concessions,2 the sole issue for

decision is whether the $12 million petitioners received pursuant

to a settlement is excludable from income under section

104(a)(2).

                           FINDINGS OF FACT

I.   Background

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

The stipulations of the parties, with accompanying exhibits, are

incorporated herein by this reference.    At the time this petition

was filed, petitioners resided in Darien, Connecticut.    Noel K.

Bradley is a party to this case only because she filed a joint

Federal income tax return with her spouse, Charles E. Bradley

(petitioner or Mr. Bradley), for their 1995 tax year.

     Mr. Bradley received his bachelor’s degree in economics from

Yale University in 1951 and his M.B.A. degree in accounting from

New York University School of Business in 1957.    After his

graduation from Yale, petitioner worked at Price Waterhouse until

1953 when he joined the U.S. Navy as a lieutenant junior grade.

He returned to Price Waterhouse in 1956 where he continued to

work until 1967, eventually becoming a general partner of the


     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code for the year in issue. All Rule
references are to the Tax Court Rules of Practice and Procedure.
     2
       By stipulation, respondent conceded the sec. 6662(a)
penalty, and petitioners conceded all other adjustments for 1995
as listed in the notice of deficiency.
                               - 3 -

accounting firm.   From 1967 to 1971, petitioner worked as an

executive vice president of the investment banking firm, Laird,

Inc., starting his career in leveraged buyouts.   Since 1967,

petitioner has served in executive and board positions with many

companies, including president of Stanwich Investment Co. and

Stanwich Partners, Inc. (Stanwich).    During 1992-95, petitioner

was embroiled in a number of lawsuits related to his business

endeavors, the settlement of six of which resulted in the

settlement payments at issue in this case (the Six Lawsuits).3




     3
       The Six Lawsuits in which petitioner was involved are as
follows (and as identified in the parties’ joint stipulated
Exhibit 79-J and herein by number): (1) Bradley v. Boyle, C.A.
No. 5:92CV171(S) (N.D.W.Va., Oct. 7, 1992); (2) Bradley v. Boyle,
C.A. No. 5:94CV29(S) (N.D.W.Va., May 24, 1994); (3) Ormet Corp.
v. Bradley, C.A. No. 5:93CV21(S) (N.D.W.Va., Jan. 20, 1993); (4)
Boyle v. Boyle, C.A. No. 87-C-772 (W.Va. Cir.Ct., Mar. 31, 1994),
affd. sub nom. Boyle v. Boyle, No. 22564 (W.Va., June 16, 1995);
(5) Boyle v. Bradley, C.A. No. 5:94CV33(S) (N.D.W.Va., Mar. 31,
1994); and (6) Bradley v. McCamic, C.A. No. 5:95CV62(S)
(N.D.W.Va., May 18, 1995). This opinion for purposes of
historical context first discusses several of the other cases and
then, discusses each of the Six Lawsuits to determine whether any
of the $76 million settlement was made for personal injury claims
and if so, whether those personal injury claims were tort-like as
described in sec. 104(a)(2).

     A settlement term sheet, dated Aug. 7, 1995 (Settlement Term
Sheet), see infra, lists Ormet Corp. v. Bradley, C.A. No.
5:92CV639 (WWE) (N.D. Conn. Nov. 2, 1992), as one of the Six
Lawsuits to be settled. This case was removed to the United
States District Court for the Northern District of West Virginia,
following a consent order by Judge Eginton, where it was
recaptioned as the aforementioned lawsuit number three, above,
and subsequently, dismissed by Judge Stamp. See infra note 33.
                                - 4 -

     A.   Ownership of Oralco, Inc.

     In 1986, petitioner, together with Robert E. Boyle (Mr.

Boyle), and William R. Strothotte4 (Mr. Strothotte), founded and

incorporated Oralco, Inc. (Oralco, or following a name change

after its reorganization, in 1994, Ormet),5 a Delaware

corporation with its principal place of business in Wheeling,

West Virginia.    During 1990 through 1995, Oralco was a holding

company owning 100 percent of the stock of Ohio River Associates,

Inc. (ORA), and Oralco Management Services, Inc. (OMS).     From

1992 through 1995, OMS served as the managing company for the

original Ormet.    ORA owned 100 percent of the stock of Ormet

Corporation6 (Ormet, or following a name change after its

reorganization, in 1994, Ormet Primary Aluminum Corporation), a

corporation organized under the laws of Delaware with its

principal place of business in Hannibal, Ohio.    ORA, like Oralco,



     4
       Mr. Strothotte was a metals trader and president of
Clarendon, Ltd., a firm investing in companies associated with
metals-trading.
     5
       In 1994, Oralco acquired the assets of Consolidated
Aluminum Corporation (Conalco). These assets consisted primarily
of rolling mills, a recycling plant, and a foil plant. As a
result of the Conalco acquisition, the names and structure of the
corporations changed. During 1994, Oralco changed its name to
Ormet Corporation, and the original Ormet Corporation changed its
name to Ormet Primary Aluminum Corporation.
     6
       In 1986, Mr. Boyle led a leveraged buyout to acquire
Ormet. Petitioner and Mr. Strothotte also participated in the
buyout, and in 1989, Mr. Boyle, petitioner, and Mr. Strothotte
became the sole owners of Ormet. Oralco was formed as the
holding company for Ormet.
                                - 5 -

was a Delaware corporation, headquartered in Wheeling, West

Virginia.    Ormet was engaged in the production of commodities,

specifically alumina, primary aluminum, and fabricated aluminum

products.

     Prior to April 21, 1992, Oralco stock was held by Mr. Boyle

(48.387 percent), Mr. Strothotte (19.355 percent), and

petitioner, individually and as trustee of a voting trust (32.258

percent).7   At all relevant times, Oralco had 1,000,000 shares

authorized but only had 500,000 shares issued and outstanding.

On October 11, 1989, Mr. Boyle, Mr. Strothotte, and petitioner

entered into a stockholder’s agreement (1989 Stockholder’s

Agreement) whereby, inter alia: (1) Each stockholder had the

right to designate one of the three members of Oralco’s board of

directors, (2) each stockholder agreed not to sell his shares to

any other stockholder, except as permitted by the agreement, and

(3) termination of the agreement was allowed by a stockholder

holding shares representing at least two-thirds of the voting

power of all outstanding Oralco shares.




     7
       The voting trust of Oct. 11, 1989, was between petitioner,
John G. Poole (Mr. Poole), and Lawrence A. Siebert (Mr. Siebert),
collectively doing business as Stanwich Partners. Petitioner
served as the voting trustee of this trust. Under the voting
trust, Mr. Bradley had the exclusive right to vote all Oralco
shares owned by him, Mr. Poole, and Mr. Siebert. Thus, for
simplicity, Mr. Bradley is treated as the owner of the shares for
purposes of the corporate control actions recounted in this
opinion.
                                 - 6 -

     B.      The Signal and Costar Loans

     During 1992 through 1995, petitioner, Mr. Seibert (through

1993), and Mr. Poole were shareholders in Stanwich, a Delaware

corporation.     Petitioner and Stanwich guaranteed a loan in the

original amount of $19,490,692 from Signal Capital Corporation

(Signal) to Oneida Products Corp. (Oneida) by guaranty agreements

dated August 17, 1988, as amended August 12, 1991.     Shortly

thereafter, in 1992, Signal commenced a lawsuit against

petitioner and Stanwich in the Superior Court of the State of

Connecticut8 (Connecticut Superior Court) to collect on loan

guaranties made by petitioner and Stanwich with respect to the

Oneida loan.    As of October 20, 1992, Signal obtained a

prejudgment attachment of all of petitioner’s right, title, and

interest in 95,000 Oralco shares.     As security for the Signal

loan, petitioner, by agreement dated October 29, 1992, pledged to

Signal his voting trust certificate for the 95,000 Oralco shares.

Then, on January 7, 1994, the Connecticut Superior Court issued a

judgment in favor of Signal and against petitioner and Stanwich

in the principal amount of $24 million with respect to the loan

guaranty.9


     8
       The action was titled Signal Capital Corp. v. Bradley &
Stanwich Partners, Inc., docket No. CV-XX-XXXXXXX-S (Jud. Dist.
of Stamford, Conn. Super. Ct. 1992).
     9
       As discussed infra, on Aug. 17, 1995, in conjunction with
the terms of the Implementing Agreement dated Aug. 18, 1995,
Signal terminated its liens against petitioner and other parties.
                                                   (continued...)
                               - 7 -

      Petitioner also guaranteed two loans, one in 1988 and one in

1991, to Costar Corporation (Costar).   These notes payable to

Costar were known as the “Somerset” note and the “Holdings” note,

respectively.   In 1992, Costar filed suit against petitioner in

the United States District Court for the District of Connecticut

to enforce petitioner’s guaranties.    The district court entered

judgment November 30, 1992, wherein petitioner agreed that as of

January 3, 1992, he and Pierre R. Debroux as guarantors owed

Costar $3,231,085.80 and $1,430,000 for the Somerset and Holdings

notes, respectively.10

II.   The Six Lawsuits

      A.   Bradley v. Boyle, Oralco, OMS, ORA, Ormet, Michael J.

O’Brien, and O’Sullivan, Graev & Karabell (Oralco/Ravenswood

Exchange of Stock)

      In 1989, petitioner, together with Mr. Boyle and Mr.

Strothotte, bought out an aluminum processing company named




      9
      (...continued)
In the Implementing Agreement, petitioner, in order to settle the
Signal claims under its judgment, the loan agreement, and related
documents, agreed to a cash payment in the amount of $27 million
and a $4 million promissory note from Mr. Bradley payable to
Signal.
      10
       A judgment was entered in the total amount of
$4,661,055.80 as the sum of the principal balances under the
Somerset and the Holdings notes plus costs, accrued but unpaid,
interest, and attorney’s fees. Because the sum of the amounts
due under the two notes is actually $4,661,085.80, the Court
assumes the small difference represents a typographical error.
                              - 8 -

Ravenswood Aluminum Corporation (Ravenswood),11 principally

located in Ravenswood, West Virginia.    Petitioner claimed that on

August 1, 1991, he was induced by Mr. Boyle and Oralco’s counsel,

Michael J. O’Brien (Mr. O’Brien), to enter into an oral “stand

still” agreement with Mr. Boyle (Boyle Agreement) whereby each

agreed that neither of them would sell to, or transfer to, or buy

Oralco shares from Mr. Strothotte.12    Petitioner also contended

that he agreed to enter into the Boyle Agreement due to concerns

that Mr. Strothotte had too much control over Ravenswood and

would damage Oralco if he gained control.    On April 21, 1992, Mr.

Boyle made an agreement with Mr. Strothotte to exchange his

Ravenswood shares for Mr. Strothotte’s Oralco shares.    Mr. Boyle




     11
       Ravenswood Aluminum Corporation is sometimes referred to
in the stipulation of facts and exhibits as “Ravenswood” or
“Ravenswood, Inc.” (collectively referred to herein as
Ravenswood).
     12
       Petitioner claimed that the oral agreement also entailed
that:
     both he and Boyle would continue to jointly vote their
     shares and Director votes to maintain joint control of
     Oralco; and he and Boyle would combine their share
     ownership and Director votes in the long-term best
     interests of Oralco in order to reach an agreement by
     which one would purchase the other’s common stock in
     Oralco; but if Strothotte made a substantial
     unsolicited, unconditional cash offer for the Oralco
     shares of either Bradley or Boyle before a definitive
     agreement was reached between them, the other must be
     advised of such offer and granted a ‘last look’ or
     right of first refusal to purchase such common shares.
     [Oralco, Inc., et al. v. Bradley, Civ. A. No. 12763,
     1992 WL 373041 (Del. Ch. Dec. 17, 1992).]
                               - 9 -

explained this by denying that any enforceable Boyle Agreement

existed.

     The exchange of Mr. Boyle’s Ravenswood shares for Mr.

Strothotte’s Oralco shares allowed Mr. Boyle to become a greater

than two-thirds majority shareholder in Oralco and to terminate

the 1989 Stockholder’s Agreement regarding Oralco, which he did

immediately.   Thereafter, Mr. Boyle and Mr. Strothotte informed

Mr. Bradley by letter13 that he had been removed as a director of

Oralco and its subsidiaries, in accordance with the termination

provision of the 1989 Stockholder’s Agreement.   Mr. Boyle

appointed himself as sole director of Oralco and its related

entities.14

     In response, on October 7, 1992, petitioner filed a lawsuit

against Mr. Boyle, Oralco, OMS, ORA, Ormet, attorney Mr. O’Brien,

and the law firm of O’Sullivan, Graev & Karabell (OGK) in the

United States District Court for the Northern District of West




     13
       The letter to petitioner effectuating his removal was
actually dated Apr. 20, 1992. The letter was incorrectly dated
because the documents were drafted on Apr. 20, 1992, but they
were not signed until after midnight. Thus, the documents should
have been properly dated Apr. 21, 1992. Vice Chancellor Chandler
in Oralco, Inc., et al. v. Bradley, supra, granted the motion to
amend the complaint to conform plaintiff’s pleadings to this
fact.
     14
       The issue of whether petitioner was validly removed as a
director of Oralco was decided in favor of the plaintiff, Oralco,
in Oralco, Inc., et al. v. Bradley, supra.
                               - 10 -

Virginia.15   In the complaint, as subsequently amended,

petitioner alleged, inter alia, breach of contract with respect

to the alleged Boyle Agreement, intentional interference with

business relationship, fraud, negligent misrepresentation,

promissory estoppel, legal malpractice, breach of fiduciary duty,

and conversion and corporate waste.     When the standstill and

right of first refusal issues were litigated by the parties, the

Chancery Court of New Castle, Delaware agreed with Mr. Boyle that

there was no enforceable Boyle Agreement.     See Oralco, Inc., et

al. v. Bradley, supra.

     B.   Bradley (individually and derivatively on behalf of

Oralco) v. Boyle, O’Sullivan, Graev & Karabell, and Oralco

     On April 21, 1994, petitioner filed a lawsuit in his

individual capacity and on behalf of Oralco against Mr. Boyle,

OGK, and Oralco as a nominal defendant in the United States

District Court for the Northern District of West Virginia.16      On

May 5, 1994, the District Court denied petitioner’s plea for a

temporary restraining order and preliminary injunction.     On

February 27, 1995, the District Court, following a trial ruled

against petitioner and subsequently, on August 8, 1995, denied

petitioner’s motions to reconsider.



     15
       This is lawsuit number one of the Six Lawsuits.     See
supra note 3.
     16
       This is lawsuit number two of the Six Lawsuits.     See
supra note 3.
                                - 11 -

     C.   Ormet v. Bradley (Collection Action)

     On November 2, 1992, Ormet Corporation filed a lawsuit in

the United States District Court for the District of Connecticut

against petitioner.17    This lawsuit asserted that petitioner owed

Ormet $714,411.47 from an unpaid July 25, 1989, note petitioner

executed in favor of Ormet in the original amount of $650,000.

     D.   Boyle v. Boyle (Boyle Divorce Proceedings and Stock

Purchase Option)

     During his contest with petitioner for control of Oralco,

Mr. Boyle was also involved in divorce proceedings with his then

wife, Camilla M. Boyle (Ms. Boyle).      Mr. Boyle and Ms. Boyle were

married on February 10, 1962.    During the majority of their

marriage, Mr. Boyle was employed as an engineer with Kaiser

Aluminum Corporation (Kaiser).    In April 1983, Mr. Boyle left

Kaiser to become the president of Ormet, which was losing

millions of dollars at the time he assumed the role of president.

In September 1986, Mr. Boyle acquired 1,500,000 ORA shares.     At

that time, ORA was the parent company of Ormet.     Through an ORA

stock redemption, a reorganization of ORA, and a leveraged buyout

of Ormet, Mr. Boyle exchanged his 1,500,000 ORA shares for

241,935 Oralco shares.    Following this reorganization, Oralco

owned all the shares of ORA, and ORA, in turn, owned all the

shares of Ormet.


     17
       This is lawsuit number three of the Six Lawsuits.      See
supra note 3.
                              - 12 -

     On November 5, 1987, Ms. Boyle filed for divorce in the

Circuit Court of Ohio County, West Virginia (Circuit Court),

seeking equitable distribution of the marital assets.   Although

the divorce proceedings lasted into 1994, the parties were

separated on November 11, 1987.   Upon the grant of divorce, by

the Circuit Court on December 15, 1992, all the Boyles’ marital

assets were divided.

     Mr. Boyle and Ms. Boyle disputed the number of Oralco shares

that should be awarded to Ms. Boyle in satisfaction of her

marital rights.   During the Boyles’ separation, the value of the

Oralco shares had increased significantly from $66.55 per share

to $275 per share.   Although Mr. Boyle acquired 241,935 Oralco

shares during his marriage with Ms. Boyle, in its December 15,

1992, order, the Circuit Court awarded Ms. Boyle only 29,273

Oralco shares and Mr. Boyle 212,662 Oralco shares.   Since Ms.

Boyle believed she was entitled to at least half of Mr. Boyle’s

Oralco shares, she appealed the divorce decree on February 17,

1993.

     On December 17, 1992, after the Boyles’ divorce decree was

entered, petitioner and Ms. Boyle entered into a confidential

option agreement (Option Agreement) granting petitioner the

option to purchase from December 17, 1992, through December 31

1996, for cash or certified funds at a price of $117 per share

all Oralco shares that Ms. Boyle might acquire from Mr. Boyle
                               - 13 -

pursuant to a final court order.   In addition, Ms. Boyle also

granted petitioner an irrevocable proxy to vote all Oralco shares

awarded to her so long as the Option Agreement was in force.

     As consideration for the Option Agreement, petitioner was to

pay Ms. Boyle $25,000 upon its execution, plus $5,000 per month

for the months of January, February, and March 1993, and $10,000

per month thereafter until the later of December 31, 1996, or

until the option was exercised or terminated.   In addition, if

Ms. Boyle was not awarded sufficient Oralco shares, when combined

with petitioner’s shares, to control Oralco, petitioner could

terminate the Option Agreement.    If the Option Agreement remained

in force through December 31, 1996, Ms. Boyle held a put option

to petitioner, which she could exercise during the first 30 days

of January 1997, if petitioner failed to purchase her shares on

or before that date.

     During Ms. Boyle’s appeal of their divorce order, Mr. Boyle

became concerned that a modification of the divorce order could

result in a distribution of more Oralco shares to Ms. Boyle.      Mr.

Boyle might then lose control of Oralco, triggering the “loss of

control provision” in a credit agreement between Ormet and a

banking syndicate.18   To avoid that eventuality and unknown to

petitioner, as of January 19, 1993, Mr. Boyle and Ms. Boyle




     18
       Mr. Boyle also argued that the loss of control provision
would trigger acquisition-financing debt and materially impair
the value of the Oralco stock for both Mr. Boyle and Ms. Boyle.
                              - 14 -

executed a confidential stipulation as to their Oralco marital stock.

     The stipulation confirmed the Boyles’ agreement as to

certain aspects of the distribution of the Oralco shares Mr.

Boyle acquired during their marriage.   Included in the

stipulation was the Boyles’ joint acknowledgment that on January

19, 1993, pursuant to an exchange agreement, Mr. Boyle exchanged

his remaining 212,662 Oralco shares for 212,662 shares of Elmwood

Acquisition Corporation (EAC II).   EAC II was a newly created

shell holding company, wholly owned by Mr. Boyle, and created by

him to assist in retaining voting control of Oralco.

     The only asset held by EAC II was the 212,662 Oralco shares

exchanged by Mr. Boyle.   The Boyles further stipulated that if

the December 15, 1992, divorce order were revised on appeal and

the marital stock became an issue, then the marital stock would

consist of Ms. Boyle’s 29,273 Oralco shares and Boyle’s 212,662

EAC II shares, rather than Boyle’s original 241,935 Oralco

shares.

     Ms. Boyle’s appeal of the divorce decree claimed that she

was entitled to 120,967.5 Oralco shares, which she alleged

represented one-half of the 241,935 Oralco shares Mr. Boyle

acquired during their marriage.   On February 18, 1994, the

Supreme Court of Appeals of West Virginia reversed the Circuit
                                - 15 -

Court divorce order.    The Supreme Court held that Ms. Boyle was

entitled to 120,967.5 Oralco shares.

     The reversal of the divorce order became final on March 21,

1994, and on March 22, 1994, Ms. Boyle’s attorney, Jolyon W.

McCamic (Mr. McCamic), filed an application with the Circuit

Court requesting Oralco to transfer an additional 91,694.5 Oralco

shares to Ms. Boyle.    Thereafter, on March 24, 1994, petitioner’s

attorney, Herbert Conner (Mr. Conner), wrote a letter to Mr.

Boyle warning him that petitioner would take legal action in the

event of any attempt by Mr. Boyle or Oralco to induce a breach of

contract with respect to Ms. Boyle and petitioner’s Option

Agreement.    Thereafter, petitioner on March 24, 1994, filed a

motion to intervene as a plaintiff in the Boyles’ divorce

proceedings.

     On March 31, 1994, the Circuit Court issued a Findings and

Divorce Decree (final divorce decree) in the Boyle’s divorce

proceeding:    (1) Denying Mr. McCamic’s application for a transfer

of 91,694.5 Oralco’s shares to Ms. Boyle, (2) ordering Mr. Boyle

to transfer 120,967.5 EAC II shares to Ms. Boyle in satisfaction

of her one-half marital rights, (3) ordering Mr. Boyle to cause

Oralco to immediately redeem Ms. Boyle’s newly acquired EAC II

shares for $14,400,000, and (4) ordering Ms. Boyle to transfer

the previously awarded 29,273 Oralco shares back to Mr. Boyle.19


     19
          Mr. Boyle was also required to hold Ms. Boyle harmless
                                                      (continued...)
                               - 16 -

     On March 31, 1994, Ms. Boyle transferred her 29,273 Oralco

shares back to Mr. Boyle.   Mr. Boyle, in turn, transferred

120,967.5 EAC II shares to Ms. Boyle.   Mr. Boyle then caused

Oralco to purchase Ms. Boyle’s 120,967.5 EAC II shares for

$14,400,000.   To finance Oralco’s purchase of Ms. Boyle’s EAC II

shares, Bancboston Financial Company (Bancboston) acting through

its employee, David L. Risdon (Mr. Risdon), lent $14,400,000 to

Oralco.   These actions prevented petitioner from exercising his

stock purchase option with Ms. Boyle because the event triggering

the Option Agreement never occurred.

     On March 31, 1994, the Circuit Court denied petitioner’s

motion to intervene in the Boyles’ divorce proceeding on the

theory that petitioner’s interests were adequately protected by

existing parties.20   This action prompted petitioner to appeal

the order to the West Virginia Supreme Court of Appeals.   On June

16, 1995, the Supreme Court of Appeals of West Virginia upheld




     19
      (...continued)
for any and all losses, liabilities, judgments, awards, damages,
assessments, charges, fines, penalties, costs, attorney’s fees,
and expenses paid, suffered or incurred by Ms. Boyle arising out
of any claim, demand, action, suit, or proceeding brought by
petitioner resulting from Ms. Boyle’s actions in compliance with
the final divorce decree.
     20
       This is lawsuit number four of the Six Lawsuits.    See
also supra note 3.
                                - 17 -

the Circuit Court’s order denying petitioner’s motion to

intervene in the Boyles’ divorce proceeding.21

     E.      Camilla Boyle v. Bradley (Litigation Regarding the

Stock Purchase Option)

     During 1994 and 1995, while petitioner was attempting to

exercise his option to purchase Ms. Boyle’s stock in Oralco, Ms.

Boyle, through her attorney, Mr. McCamic, filed a lawsuit against

petitioner in the Circuit Court of Ohio County, West Virginia

alleging that the Option Agreement was induced by fraud.22       This

action was removed to the United States District Court for the

Northern District of West Virginia and assigned to Judge Stamp.

     F.      Bradley v. McCamic, Risdon, Bancboston (Third Party

Suit)

     On May 24, 1994, petitioner, filed a third-party complaint

against Ms. Boyle’s attorney, Mr. McCamic, Bancboston employee,

Mr. Risdon, and Bancboston.23    On or about March 8, 1995, Ms.

Boyle responded to petitioner’s third-party complaint with an

affidavit stating that when she executed the Option Agreement,

she believed petitioner had the resources to pay for any shares

of Oralco she would receive in settlement of her marital claims.


     21
       This order also affirmed the order issued in lawsuit
number four. See also supra note 3.
        22
       This is lawsuit number five of the Six Lawsuits.     See
supra note 3.
     23
       This is lawsuit number six of the Six Lawsuits.     See
supra note 3.
                               - 18 -

Ms. Boyle contended that until late March 1994, she was not aware

of petitioner’s allegedly defaulted financial obligations to

Costar and Signal totaling $31,086,358.80 and a $650,000 payment

due to Oralco.24

III. Statements by Mr. Boyle or Ormet

     Mr. Boyle or Ormet released several documents to the public

between April 15 and May 11, 1994.      The April 28, 1994, document

was a letter to Ormet employees signed by Mr. Boyle.     Four

documents were press releases.   Another document was an article

in the May 11, 1994, edition of the company’s “Ormet News”.

Petitioner cited statements in the documents as the basis for his

personal injury claims.

     For example, Mr. Boyle or Ormet made the following

pronouncements:    (1) “This ad is another of the many attempts by

Charles Bradley, a minority shareholder in Oralco, to extract

money from Oralco for his personal benefit.”; (2) “Mr. Bradley

has a long history of driving companies * * * into the ground,

resulting in jobs being lost forever while maintaining some

degree of personal wealth.”; and (3) “Bradley is a self-styled




     24
       Petitioner’s financial obligations under these notes
resulted from the decisions in the Signal and Costar litigations
and the settlement and compromise of lawsuit number three of the
Six Lawsuits. See supra note 3. Judge Stamp dismissed lawsuit
number three on Aug. 10, 1995. See also infra note 33.
                               - 19 -

deal maker who cares little for the damage created and people’s

lives destroyed when his deals fall apart.”25

      Petitioner’s law firm, Finn Dixon & Herling LLP, reviewed

the basis of petitioner’s claims for libel, slander, and

intentional infliction of emotional distress.    In a memorandum to

petitioner dated November 12, 1997, the firm stated that neither

Mr. Boyle nor Ormet had a valid truth defense to petitioner’s

claim for defamation.

IV.   Lawsuit Pleadings

      Despite dozens of pages of pleadings, there was no reference

in any of these cases to any personal injuries suffered by

petitioner.    Although petitioners amended their complaints

several times and the parties filed counterclaims and derivative

claims, none of these documents contained any claims for personal

injuries.   The Court notes the parties stipulated:   “Petitioner

did not file any lawsuits against Oralco, Ormet Corporation

and/or Boyle concerning any personal injuries that he incurred as

a result of any actions undertaken and/or statements made or

published by Oralco, Ormet Corporation and/or Boyle concerning

petitioner.”    This stipulation is consistent with the credible

      25
       Petitioners attached to their opening brief page two of
“Ormet News”, an internal company newsletter, seeking to use
statements contained therein as evidence. However, joint
stipulated Exhibit 169-J, as stipulated by the parties and filed
with the Court, did not include page two of “Ormet News”, and
petitioners did not separately offer page two into evidence.
Thus, the Court will disregard page two. Petitioners are not
allowed to add documents into evidence by attaching them to their
brief.
                                - 20 -

testimony of Mr. Bachman, Oralco’s and Mr. Boyle’s attorney, who

stated:     “I don’t remember spending any time ever evaluating or

defending against a claim of libel or slander.”     Petitioner and

his attorney, Mr. Conner, testified that they had intended to

amend their pleadings at some point to allege personal injury in

the form of libel and slander but were deterred from doing so by

the court, which informally requested that no additional claims

be filed until the pending claims could be resolved.     As a

result, Mr. Conner first informed Mr. Boyle and Ormet of Mr.

Boyle’s personal injury claims in a letter dated July 27, 1995,

to Cathy M. Armstrong, counsel for Ormet.

V.   Settlement of the Six Lawsuits

     Settlement efforts to resolve the Six Lawsuits began in the

fall of 1994, but they did not become serious until the summer of

1995.     In order to raise funds to settle the lawsuit between

petitioner and Signal, petitioner’s counsel discussed Ormet’s

possible redemption of petitioner’s Ormet shares,26 as well as,

the Ormet shares under petitioner’s voting control as trustee of

the voting trust.

     To determine the value of petitioner’s Ormet stock, both

petitioner and Mr. Boyle conducted valuations of Ormet to

facilitate Ormet’s possible stock redemption.     Petitioner

received a draft valuation of Ormet, dated December 5, 1994, from



     26
          By this date, Oralco had changed its name to Ormet.
                               - 21 -

C. David Allen, Jr., of Price Waterhouse LLP approximating the

valuation of Ormet in the range of $700 million to $800

million.27   By letter dated March 1, 1995, to Mr. Conner, Donald

J. Pfingstler of Barrington Consulting Group, Inc., addressed the

value of Ormet and the value of petitioner’s shares in Ormet held

individually and as trustee under the voting trust agreements.

     Mr. Pfingstler concluded that had petitioner acquired

sufficient Ormet shares to control Ormet, the valuation of his

shares would have been $376 million to $588 million; otherwise,

as turned out to be the case, the valuation of petitioner’s

shares would be approximately $110 million to $165 million

because they reflected a minority discount.   In a June 27, 1995,

letter to Charles E. Bachman (Mr. Bachman), attorney for Ormet,

Mr. Conner indicated that petitioner would sell his shares and

the shares of his voting trust back to Ormet “for cash[,] and

[it] would involve the settlement and discontinuation of all

litigation [the Six Lawsuits], at the buyer’s request, or

Bradley’s cooperation in the continued pursuit of the litigation,

again, at the buyers [sic] option (and with his financing of the

costs of litigation).”   This offer was subject to further

negotiations.




     27
       Mr. Conner testified that petitioner was not able to
effectively use the Price Waterhouse LLP valuation in determining
the value of Ormet because Price Waterhouse LLP withdrew its
draft valuation, claiming that it was unauthorized.
                               - 22 -

     The parties exchanged several drafts of various settlement

agreements before they reached a final agreement.    After

negotiated changes, Ormet and Mr. Boyle both believed as did Mr.

Bradley that there was a binding settlement of all relevant

issues when the Settlement Term Sheet was executed.    Mr. Bradley

states in his opening brief:   “Parties to a term sheet agree to

the conditions set forth in the term sheet and to that extent it

is considered binding with respect to those particular items.”

     The Settlement Term Sheet, dated August 7, 1995, was signed

by the parties.   Petitioner (based on the Stanwich fax machine

date on the base of the document and the date of Mr. Bachman’s

cover sheet correspondence) appears to have signed the Settlement

Term Sheet on August 8, 1995, Boyle and Ormet on August 8 or 9,

and Signal on or after August 8, 1995, probably August 11, 1995.

     Of particular note was the demand by Mr. Boyle and Oralco

that the settlement result in a complete resolution and release

of any and all claims known or unknown at the time of settlement.

Mr. Bachman credibly testified regarding the August 7, 1995,

Settlement Term Sheet and whether he remembered any controversy

over the release between himself and Mr. Conner.    He stated:

“No, I remember that if there was going to be a settlement here,

it would be a settlement.   I mean, as I said, real, imagined,

current, historical, future, and as broad as you can define the

release.”   It is not surprising or unusual that broad general
                              - 23 -

mutual releases were required by paragraph 6c of the Settlement

Term Sheet, as many settlements of this kind include similar

provisions as standard practice.   Mr. Bradley’s attorney, Mr.

Conner, testified that the issue of a general release was not

resolved until the subsequent Implementing Agreement was

executed.

     In a memorandum dated June 30, 1995, to Mike Dougherty (Mr.

Dougherty), a tax attorney, Scott Junkin (Mr. Junkin), counsel

for petitioner, expressed petitioner’s desire to structure the

Oralco/Ormet payout such that a portion would be nontaxable.     In

his memorandum, Mr. Junkin informed Mr. Dougherty:

     CEB wants to know if there is any way to structure the
     settlement so that a portion of the ORALCO payments are
     non-taxable. He mentioned allocating a portion of the
     settlement to the share repurchase and a portion to
     dropping his claims under the law suit. I expressed
     skepticism about whether any portion could be non-
     taxable, but I will defer to you on that. CEB may be
     thinking of some analogy to the non-taxability of
     settlement payments for pain and suffering in a
     negligence suit.

     On the same day petitioner signed the Settlement Term Sheet,

through correspondence with his attorney, he sought to confirm

his desire that a portion of the Ormet settlement would be

treated as nontaxable for Federal income tax purposes.

Petitioner expressed his expectations in a letter to Mr.

Dougherty dated August 8, 1995, that $12 million would be

received “for settlement of litigation on a personal injury

basis”.   By letter dated August 14, 1995, petitioner asked his
                              - 24 -

attorney, Mr. Conner, to review Mr. Dougherty’s memorandum of

August 11, 1995, and assemble all the documents showing damage to

his reputation.

     Petitioner also contacted his attorney, Brett Dixon (Mr.

Dixon), to review the tax issues related to the settlement.     By

memorandum dated August 15, 1995, Mr. Dixon stressed the

importance of inserting language into the Implementing Agreement

which would reflect that the $12 million payment was for

petitioner’s actual personal and/or physical injury.   He wrote:

     In light of the punitive-versus-actual damages issue we
     discussed with respect to the $12 million payment in
     settlement of the litigation, I think it is important
     to try to get language into the Implementing Agreement
     to the effect that the payment is being made in respect
     of actual personal injury (defamation, libel, slander,
     emotional distress) that you suffered as a result of
     this matter. It would also be helpful if you could
     document any physical injury or illness you suffered
     (severe emotional distress requiring treatment, etc);
     this would provide an alternative basis for exclusion
     (i.e., even if the personal injury damages are
     punitive, they relate to a physical condition).
     [Emphasis added.]

     Mr. Dixon further suggested that petitioner include “in the

Implementing Agreement a covenant that the partics [sic] will

respect the allocation between the different elements of recovery

for all tax purposes.”   As late as August 16, 1995, Mr. Dixon was

still finalizing the language he believed would be ideal for

petitioner to include in the Implementing Agreement.   In his

memorandum to petitioner of that date, Mr. Dixon suggested the

following language be included in any final agreement:
                                - 25 -

     Ormet and Bradley acknowledge and agree that the
     Bradley Litigation Settlement Price is being paid in
     respect of actual personal injury (including, without
     limitation, damage to personal reputation and mental
     and emotional distress) suffered by Bradley as a result
     of the Litigations and other actions taken by and
     disputes with the Defendants.

     Mr. Dixon also opined in a memorandum that Ormet should not

care about how petitioners characterize the settlement payment

for tax purposes since it would be deductible by Ormet in any

event.   Contrary to Mr. Dixon’s advice, because of objections by

Mr. Boyle and Ormet, neither his suggested language, nor anything

similar, was contained in the Implementing Agreement.   Mr. Dixon,

due to the litigants’ animosity, anticipated this possibility

noting in the same memorandum that Ormet may be unwilling to

include the language in a final agreement.   Alternatively, he

suggested that the agreement language be “watered down”.   He also

expressed his hope that:   “At a minimum, Ormet should be willing

to permit inclusion of a statement that you represent that you

have suffered such injuries.”

     In reference to the $12 million payment, the Settlement Term

Sheet stated that “Ormet shall pay $12,000,000 to Bradley in

settlement of his direct claims against Ormet.”    The Implementing

Agreement incorporated the terms of the Settlement Term Sheet

utilizing the following more expansive language:
                              - 26 -

          3. Litigation Settlement; Expense Reimbursement;
          Releases; Termination of Voting Trust Agreement.

          (a) * * * Ormet will pay to Bradley, by wire
     transfer of immediately available funds to an account
     specified to Ormet in writing, (i) $12 million (the
     “Bradley Litigation Settlement Price”) in settlement of
     all direct claims (“Direct Claims”) by Bradley against
     Ormet, whether relating to the Litigations or
     otherwise, including but not limited to those libel and
     slander claims described in that certain letter from
     Herbert Bennett Conner to Charles E. Bachman dated
     August 11, 1995, and (ii) $4 million as reimbursement
     of legal fees and expenses related to the Litigations
     (the “Litigation Reimbursement”).[28]

          (b) Each Member hereby acknowledges that any
     claims against the Defendants or the Other Litigations
     Parties other than the Direct Claims have no value, and
     that no payment is being made to any Member in
     settlement of, or otherwise with respect to, such
     claims.

     Mr. Conner testified that the Settlement Term Sheet

providing for the $12 million payment related only to the

settling of petitioner’s filed direct claims against Ormet, not

to any libel or slander suits.   Further, Mr. Dixon stated that

there were no documents regarding petitioner’s physical injuries

available when Mr. Dixon gave a tax opinion regarding the

settlement.   Mr. Bachman testified that he did not spend any time

defending Oralco against any personal injury claims because

petitioner never filed any claims against it.   Mr. Boyle, Mr.


     28
       The Aug. 11, 1995, letter written by Mr. Conner and
referred to in Mr. Bachman’s testimony was attached to
petitioners’ opening brief, but petitioners never offered it into
evidence. Petitioners are not permitted to supplement the
evidence to include this letter by merely attaching it as an
exhibit to their brief. Accordingly, the Court will disregard
this document. See also supra note 25.
                              - 27 -

Bachman, and Oralco refused to designate any portion of the $12

million settlement specifically for any unfiled alleged personal

injury claims of libel and slander.    Instead, even the

Implementing Agreement designated the $12 million as payment for

all direct claims including any libel and slander.    This general

language does not allocate any amount to personal injury claims.

     Pursuant to the settlement, payments were made on August 18,

1995, to Mr. Poole $13,229,808, Mr. Siebert $4,410,060, Mr. Hall

$1,200,072, and Precision $1,274,100 in exchange for their shares

of stock in Ormet.   Petitioner personally received $9,485,960

plus the $27 million paid to Signal and the $3,400,000 paid to

Costar for a grand total of $39,885,960 in exchange for his Ormet

shares plus $12 million for his direct claims.

     Petitioners also received $4 million as a reimbursement for

petitioner’s legal fees and expenses related to the Six Lawsuits.

Petitioners had deducted or would have deducted these reimbursed

legal fees and expenses as business expenses on their 1995

Schedule C, Profit or Loss From Business.    The parties have

stipulated that “None of the aforesaid legal fees or expenses

were allocated to any of petitioner’s claims against Oralco,

Ormet Corporation and/or Boyle for libel, slander and/or

defamation.”   Nevertheless, petitioners excluded the $12 million

Ormet payment from their gross income on their 1995 return on the

basis of section 104(a)(2).
                               - 28 -

                               OPINION

I.   Contentions of the Parties

     Petitioners contend that there were two separate

transactions that occurred when the parties resolved their

disputes--a sale of stock for $60 million shared in by all

stockholder parties of the Voting Trust and the $12 million

payment from Ormet to Mr. Bradley.      The later payment, it is

argued, was paid only to Mr. Bradley because it was in settlement

of only his claims for what he maintains was a conspiracy of

defamation, slander, and libel to his business reputation, as

well as intentional infliction of emotional distress.

     Petitioners argue that had any part of the $12 million been

paid for stock, it would have had to be shared with the other

parties to the Voting Trust.   Because it was not shared, the only

possible explanation is Mr. Bradley’s personal injuries, payment

for which would be excludable from gross income under section

104(a)(2).   As a part of the settlement, a general release was

required which would include Mr. Bradley’s tort-type personal

injury claims.29


     29
       Petitioner underwent surgery in August 1993 for prostate
cancer. Although on brief petitioners claimed that the increased
stress resulting from petitioner’s involvement in the Six
Lawsuits adversely affected his ability to fight the cancer,
there is no evidence to suggest that events resulting from the
Six Lawsuits were the indirect, let alone, the proximate cause of
petitioner’s metastasized cancer. “[T]he consequences of a
dispute are not necessarily commensurate with its origin.” Glynn
v. Commissioner, 76 T.C. 116, 121 (1981) (citing Knuckles v.
                                                    (continued...)
                              - 29 -

     Petitioners contend that they have, by implication,

established the $12 million was paid on account of Mr. Bradley’s

personal injury claims by virtue of negative inference.    In

addition, they assert their right to arrange and conduct their

affairs to minimize adverse tax implications.   See Commissioner

v. Newman, 159 F.2d 848, 850-851 (2d Cir. 1947) (Hand, J.,

dissenting).   They point to the Implementation Agreement, the

final settlement document, which they contend supersedes all

others and implements their tax planning.   They note it provides

the $12 million will be paid to Mr. Bradley “in settlement of all

direct claims * * * by Bradley against Ormet, whether relating to

the Litigations [the Six Lawsuits] or otherwise, including but

not limited to those libel and slander claims described in that

certain letter from Herbert Bennett Conner to Charles E. Bachman

dated August 11, 1995.”

     Respondent counters by arguing the disputes were settled by

the binding Settlement Term Sheet, which reflects the actual

basis of the settlement, and the Implementing Agreement does not

negate the Settlement Term Sheet.   Further, respondent contends

that the Six Lawsuits did in fact involve direct claims by Mr.

Bradley against both Ormet and Mr. Boyle and that these direct



     29
      (...continued)
Commissioner, 349 F.2d 610 (10th Cir. 1965), affg. T.C. Memo.
1964-33), affd. 676 F.2d 682 (1st Cir. 1982). Thus, we do not
discuss whether the settlement payment was paid on account of
physical sickness.
                              - 30 -

claims were contract damage claims not personal injury tort

claims.

      Respondent characterizes petitioners’ arguments as self-

serving attempts to structure the settlement to minimize their

tax exposure.   Respondent contends that petitioners did not

provide any evidence that the payment was actually in settlement

of Mr. Bradley’s alleged personal injuries.   Instead, the $12

million may have been, in whole or in part:   A payment for

contract claims; additional disguised stock purchase price;

and/or commission to Mr. Bradley for services to all stockholder

parties of the Voting Trust for maintaining the various actions

and negotiating the resolution of these matters; and to end the

then-ongoing significant litigation costs foisted upon the

parties by dint of petitioners’ litigation.

II.   Burden of Proof

      Where the Commissioner has determined a deficiency in tax,

the taxpayer bears the burden of proving facts that show the

determination is incorrect.   Rule 142(a)(1); Welch v. Helvering,

290 U.S. 111, 115 (1933); Feldman v. Commissioner, 20 F.3d 1128,

1132 (11th Cir. 1994), affg. T.C. Memo. 1993-17.   However, the

burden of proof may shift to respondent under section 7491(a).

Section 7491 applies to examinations commenced after July 22,

1998.   Information document requests in the record indicate

respondent’s examination commenced on or before August 1997.
                                  - 31 -

Therefore, section 7491 does not apply, and the burden of proof

remains with petitioners.

III. Determinations of Gross Income

     The definition of gross income under section 61(a) broadly

encompasses any accession to a taxpayer’s wealth.       The scope of

gross income is sweeping.       United States v. Burke, 504 U.S. 229,

233 (1992); Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429

(1955).   Exclusions from gross income are narrowly construed.

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

v. Burke, supra at 248 (Souter, J., concurring in judgment);

Taggi v. United States, 35 F.3d 93, 95 (2d Cir. 1994).

Therefore, settlement proceeds constitute gross income unless the

taxpayer proves they are specifically excepted by another

statutory provision.

     Section 104(a)(2) provides for an exclusion from gross

income:

     SEC. 104.   COMPENSATION FOR INJURIES OR SICKNESS.

          (a) In General.--Except in the case of amounts
     attributable to (and not in excess of) deductions
     allowed under section 213 (relating to medical, etc.,
     expenses) for any prior taxable year, gross income does
     not include--

                       *    *      *    *    *    *    *

                (2) 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 * * *
                              - 32 -

     Neither the statute nor the legislative history of section

104(a)(2) offers any explanation of the term “personal injuries”.

United States v. Burke, supra at 234; Threlkeld v. Commissioner,

87 T.C. 1294, 1305 (1986), affd. 848 F.2d 81 (6th Cir. 1988).

The regulations under section 104(a)(2) have formally linked the

identification of “personal injury” to traditional tort

principles since 1960.   United States v. Burke, supra at 234.

     Section 1.104-1(c), Income Tax Regs., establishes the

requirements of section 104(a)(2) and provides:

          (c) Damages received on account of personal
     injuries or sickness.--Section 104(a)(2) excludes from
     gross income the amount of any damages received
     (whether by suit or agreement) on account of personal
     injuries or sickness. The term “damages received
     (whether by suit or agreement)” means an amount
     received (other than workmen’s compensation) 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.

     The plain language of section 104(a)(2) and the text of the

regulations establish two independent requirements that must be

fulfilled for any recovery to be excluded from gross income.     The

taxpayer must demonstrate:   (1) The underlying cause of action

giving rise to the recovery was “based upon tort or tort type

rights”, and (2) the settlement was entered into “on account of

personal injuries or sickness”.   See United States v. Burke,

supra at 234-235.
                              - 33 -

IV.   Characterizing “personal injuries”

      What constitutes “personal injuries” and whether damages

were received because of them is a question of fact.     Threlkeld

v. Commissioner, supra at 1305.   It is established that “personal

injuries” encompasses both physical and nonphysical injuries.30

United States v. Burke, supra at 237 n.6 (quoting Rickel v.

Commissioner, 900 F.2d 655, 658 (3d Cir. 1990), affg. in part and

revg. in part 92 T.C. 510 (1989)); Threlkeld v. Commissioner,

supra.

      In Seay v. Commissioner, 58 T.C. 32, 37 (1972), this Court

held that damages received for mental strain, personal

embarrassment, and injury to personal reputation may be excluded

under section 104(a)(2).   Specifically, personal injuries include

emotional distress, see Burke v. United States, supra at 235 n.6,

mental pain and suffering, see Bent v. Commissioner, 835 F.2d 67,

70 (3d Cir. 1987), affg. 87 T.C. 236 (1986), and injury to




      30
       Sec. 104(a)(2) was amended in 1996 by the Small Business
Job Protection Act of 1996, Pub. L. 104-188, sec. 1605(a), 110
Stat. 1838, effective generally for amounts received after Aug.
20, 1996. In relevant part, the amendment added the modifier
“physical” after “personal” and before “injuries”. This
amendment was made to clarify that amounts received on account of
personal injuries must be received for physical injuries and not
exclusively for emotional distress. However, amended sec.
104(a)(2) does allow an exclusion for the amount of damages in
excess of the amount paid for medical care attributable to
emotional distress. Because the $12 million at issue here was
received before Aug. 20, 1996, sec. 104(a)(2) as it existed
during 1995 is the law applicable to this case.
                               - 34 -

personal and professional reputation, see Threlkeld v.

Commissioner, 848 F.2d 81, 83-84 (6th Cir. 1988).

     There is no distinction between damage to one’s personal

reputation and one’s business reputation.     Threlkeld v.

Commissioner, 87 T.C. at 1305.   Thus, had Mr. Bradley’s claim for

defamation, libel, intentional infliction of emotional distress,

and damage to his reputation been made, it would be a claim for

nonphysical personal injuries and would generally fall within the

ambit of personal injuries for purposes of section 104(a)(2).

V.   Rationale of Settlement

     Determining whether a settlement was entered into on account

of sickness or personal injuries requires an examination of the

settlement agreement language.   Pipitone v. United States, 180

F.3d 859, 863 (7th Cir. 1999).   In support of petitioners’

contention that the $12 million was paid on account of tort-type

personal injuries, several cases are cited.    Reliance on them is

misplaced, however, since these cases only point out the nature

of the tort injury, without reference to the motivation behind

each settlement payment.   It is not sufficient that a tort or

tort-type injury exists.   See United States v. Burke, supra at

234-235; see also Threlkeld v. Commissioner, 87 T.C. at 1305.     To

be exempt, the damages received must be in settlement of those

injuries.   Sec. 1.104-1(c), Income Tax Regs; see also

Commissioner v. Schleier, 515 U.S. at 337.
                               - 35 -

     Here, the Settlement Term Sheet contained a very general

reference to petitioner’s claims against Ormet:31   “in settlement

of [Mr. Bradley’s] direct claims against Ormet”.    It failed to

make even a general, much less a definitive allocation between

tort or tort-like claims excludable under section 104(a)(2) and

other claims not excludable under section 104(a)(2).   Even the

“Johnny-come-lately” paragraph 3 of the Implementing Agreement

gave only very general indications as to the alleged specific

tort claims.   It said:   “including but not limited to those libel

and slander claims described in * * * the letter dated August 11,

1995”.

     A.   Express Language

     Language in a settlement agreement can offer probative

evidence on how a settlement payment should be treated for

purposes of section 104(a)(2).    See, e.g., Bent v. Commissioner,

87 T.C. 236, 246 (1986), affd. 835 F.2d 67 (3d Cir. 1987).

Petitioners did not provide credible evidence of an agreed-upon

amount attributable to personal injuries between petitioner and

Ormet or their respective counsel in either the Settlement Term

Sheet or the Implementing Agreement.

     Petitioner’s law firm, Finn Dixon & Herling LLP, had made

petitioners aware that the absence of documentation supporting




     31
       See supra note 5 discussing the change of the company’s
name from Oralco to Ormet.
                              - 36 -

payment of an agreed amount for personal injury would be

problematic.   In a memorandum to petitioner, the firm wrote:

          Where a settlement payment is only partially in
     payment for tortious injury, the burden of proof is on
     the recipient to show the amount paid for the tort.
     Frank, 22 T.C. 945 (1954), [affd. 226 F.2d 600 (6th
     Cir. 1955)]. Allocations in a settlement agreement are
     respected if they are reasonable. In Seay, 58 T.C. 32
     (1972), acq. 1972-2 CB 3, the taxpayer received payment
     for breach of contract and for personal injuries from
     embarrassing publicity. A letter confirming the
     apportionment of funds attributable to personal injury
     signed by negotiators on both sides was held to have
     established the amount that was attributable to
     personal injury. [Emphasis added.]

The record is devoid of any evidence helpful to petitioners of

the type suggested by petitioner’s counsel.

     Mr. Dougherty noted that one of petitioner’s problems would

be “sustaining the bona fides of the allocation if challenged.

Allocations to personal injury recoveries will be respected if

made in an adversarial context, at arm’s length, and in good

faith.”   Mr. Dougherty cited Knuckles v. Commissioner, 349 F.2d

610 (10th Cir. 1965), affg. T.C. Memo. 1964-33, as an example

where exclusion from gross income was denied when counsel

“pressed for an allocation to personal injuries late in the

settlement negotiations to get a better tax result”.

     Both the Settlement Term Sheet and the Implementing

Agreement provide for a “global release” of petitioner’s claims

against Ormet.   Yet, none of the settlement documents earmarked a

specific amount exclusively for petitioner’s personal injuries
                               - 37 -

including libel or slander.    The Court finds, as a factual

matter, that the Settlement Term Sheet speaks for itself and that

any dispute about the mutual releases was merely quibbling.

     A court may not be in a position to apportion damages among

various contract and tort claims where it appears that the

settlement was all-encompassing.     Taggi v. United States, supra

at 96.32   It is petitioner’s duty in this case to prove the proper

allocation between taxable and nontaxable amounts.      Pipitone v.

United States, supra at 865.    “‘[F]ailure to show the specific

amount of the payment allocable to the claims of tort or tortlike

damages for personal injuries results in the entire amount’s

being presumed not to be excludible.’”      Id. at 864 (quoting Wise

v. Commissioner, T.C. Memo. 1998-4); see Pipitone v. United

States, supra at 864; Taylor v. Commissioner, T.C. Memo. 1999-

323, affd. 246 F.3d 676 (9th Cir. 2000); Morabito v.

Commissioner, T.C. Memo. 1997-315.

     State law does not assist petitioner.     None of petitioner’s

State claims as presented in his State court pleadings pertained

to any tort or tort-type injuries.      Instead, the pleadings

referenced petitioner’s contest for control of Ormet and other

related contractual claims.


     32
       Because this case would normally be appealable to the
Court of Appeals for the Second Circuit, absent stipulation to
the contrary, Taggi v. United States, 35 F.3d 93, 95 (2d Cir.
1994), is controlling here under this Court’s Golsen rule. See
Golsen v. Commissioner, 54 T.C. 742 (1970), affd. on another
ground 445 F.2d 985 (10th Cir. 1971).
                               - 38 -

     State law is of little help where there are several
     claims, only some of which are for personal injuries.
     The State law classification of the various claims will
     be of no assistance identifying the claim or claims or
     in carving up the damage recovery. In such cases we
     must look to various factors, including the allegations
     in the State court pleadings, the evidence adduced at
     trial, a written settlement agreement, and the intent
     of the payer.* * * [Threlkeld v. Commissioner, 87 T.C.
     at 1306-1307.]

     B.    Bona Fide Dispute

     Section 1.104-1(c), Income Tax Regs., defines damages for

purposes of the exclusion under section 104(a)(2) as amounts

which are received from prosecution of a legal suit, or “through

a settlement agreement entered into in lieu of such prosecution”.

In this context, “‘[a] settlement is an agreement to terminate or

forestall all or part of a lawsuit’”.   Taggi v. United States,

supra at 96 (quoting Gorman v. Holte, 211 Cal. Rptr. 34, 37 (Ct.

App. 1985)); see also McCleary v. Armstrong World Indus., Inc.,

913 F.2d 257, 259 (5th Cir. 1990).

     Settlement must involve a bona fide dispute over excludable

damages.   Taggi v. United States, supra at 96.   The requirement

of a bona fide dispute precludes ”a contrived ‘settlement’

designed to avoid taxation of the [settlement] proceeds.”    Id.

The record shows that the first time Mr. Boyle or Ormet was aware

petitioner was asserting personal injury claims was following

receipt of the letter to Mr. Boyle’s counsel of July 27, 1995.

Petitioner’s assertion of the issue of personal injuries just

prior to the drafting of the Settlement Term Sheet is not
                               - 39 -

determinative.   The fact that personal injuries were not

mentioned in the Settlement Term Sheet supports the conclusion

that the personal injuries, or at least their dollar amount, were

contrived.

     Mr. Dixon testified that he was not involved in the

settlement, nor was he aware that, as a result of the execution

of the Settlement Term Sheet, the parties had agreed to release

the Six Lawsuits prior to petitioner’s receipt of Mr. Dixon’s

August 15, 1995, letter.33   Mr. Conner testified that the

litigation among the parties pertained only to the filed suits

and not to any libel or slander suits.

     After execution of the Settlement Term Sheet, petitioner

sought advice regarding treatment of part of the settlement

proceeds as nontaxable.   Mr. Dixon first advised petitioner after

execution of the Settlement Term Sheet.   These facts are

indicative that petitioner, Ormet, and Mr. Boyle were not

previously involved in serious discussions or negotiations

contemplating a payment for personal injuries.   Petitioner’s

attempted allocation of $12 million in the Implementing Agreement



     33
       Judge Stamp of the United States District Court for the
Northern District of West Virginia dismissed lawsuits number one,
two, and three of the Six Lawsuits on Aug. 10, 1995, and lawsuits
number five and six of the Six Lawsuits on Aug. 11, 1995.
Lawsuit number four was resolved when Judge Stamp granted
petitioner’s petition for relief from rules 23(e) and 23.1 of the
Federal Rules of Civil Procedure with respect to formal notice
and court approval of the global settlement of the parties on
Aug. 18, 1995.
                                - 40 -

was contrived.    See Robinson v. Commissioner, 102 T.C. 116

(1994), affd. on this issue and revd. in part. 70 F.3d 34 (5th

Cir. 1995); Burditt II v. Commissioner, T.C. Memo. 1999-117.

     C.   Intent of the Payor

     In the absence of any express language in the agreement, the

intent of the payor is the most important factor in determining

the purpose of the payment.     Pipitone v. United States, 180 F.3d

at 864; Kurowski v. Commissioner, 917 F.2d 1033, 1036 (7th Cir.

1990), affg. T.C. Memo. 1989-149; Knuckles v. Commissioner, 349

F.2d 610, 613 (10th Cir. 1965); Agar v. Commissioner, 290 F.2d

283, 284 (2d Cir. 1961), affg. 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); Kroposki v.

Commissioner, T.C. Memo. 1997-563.

     Petitioner and Ormet negotiated the terms of the Settlement

Term Sheet for several months before agreeing to a final version.

Paragraph 10 of the Settlement Term Sheet finalized their mutual

assent stating:   “This Term Sheet is intended to constitute a

binding agreement among the parties thereto, subject only to the

negotiation and execution of satisfactory documentation.”

Although the binding nature of the settlement terms was

explicitly stated in the Settlement Term Sheet, whether the
                               - 41 -

 Settlement Term Sheet is binding or not,34 absent a definitive

and adverse party allocation in the settlement document, the

payor’s intent behind the settlement governs the allocation of

the damage payments.35   More importantly, at the time Ormet and

Mr. Boyle initially agreed to the settlement terms, they were

intending their $12 million payment to be for contract claims in

the six filed cases not tort-like personal injury claims by Mr.

Bradley, the possible existence of which had only been recently

raised.   Thus, it is apparent the $12 million payment was only



     34

     “[W]hether [an] enforceable contract arises from
     preliminary negotiations and letter of intent or must
     await formal agreement depends on the intent of the
     parties.” “In ascertaining the intent of the parties
     to a contract, it is their outward and objective
     manifestations of assent, as opposed to their
     undisclosed and subjective intentions, that matter.” *
     * * This is true “[g]iven the highly detailed nature of
     the [letter of intent], the important commercial
     circumstances in which it was negotiated, and the fact
     that the [letter of intent] appears in all respects to
     be a binding contract as to certain promises.”
     [Gillenardo v. Connor Broad. Del. Co., No. C.A. 98C-06-
     015 WLW, 2002 WL 991110, at *6 (Del. Super. Apr. 30,
     2002); fn. refs. omitted.]
     35
       A settlement may be intended to cover claims not yet
added to an existing lawsuit. See Eisler v. Commissioner, 59
T.C. 634 (1973), acq. 1973-2 C.B. 1. However, the facts in
Eisler are distinguishable from those in the instant case. In
Eisler, both the payor and the payee had a mutual understanding
as to the reason for the settlement payment and the intent of the
release instrument. In the instant case, the payor did not
intend for the payment to be made for personal injuries at the
time the Settlement Term Sheet was agreed to. There has been no
factual showing that either Mr. Boyle or Ormet intended any of
the payments, at the time of the signing of the Settlement Term
Sheet, to be for personal injuries.
                              - 42 -

intended to pay for petitioner’s direct claims and was not

necessarily intended to include claims of libel, slander, and

emotional distress as later alluded to in the Implementing

Agreement.

      Moreover, it is the absence of knowledge of the claim by Mr.

Boyle and Ormet that is most damaging to petitioner.     The basis

of the controversies between petitioner and Ormet centered around

issues dealing with directors’ rights in a contest for corporate

control and petitioner’s rights pursuant to the Option Agreement.

These claims are essentially contractual in nature.     The record

reflects that these disputes were petitioner’s and Ormet’s

primary concern in conducting and settling the Six Lawsuits.

      Petitioner’s attorney, Mr. Conner, wanted Ormet’s attorney,

Mr. Bachman, to allocate the $12 million to the personal injury

claims that petitioner had not filed, but Mr. Bachman, Mr. Boyle,

and Ormet were unwilling to do so.     In fact, Mr. Bachman

testified that Ormet did not spend any time defending against

claims for libel or slander because there were none filed by

petitioner.

VI.   Conclusion

      Petitioners have not demonstrated that the $12 million

payment Mr. Bradley received from Ormet was “on account of

personal injuries or sickness”.   Moreover, the Court will not

speculate as to unstated possible reasons for the settlement nor
                               - 43 -

conjure an amount to settle alleged tort-like personal injury

claims.    Absent proof of a specific payment for tort-like

personal injuries or evidence that Ormet intended its $12 million

payment for Mr. Bradley’s personal injuries as part of a bona

fide dispute settlement, petitioners do not meet the criteria for

exclusion of the $12 million from income under section 104(a)(2).

Thus, in accordance with section 61, the $12 million payment must

be included in petitioners’ gross income for the 1995 taxable

year.

     To reflect the foregoing and concessions made by the

parties,



                                          Decision will be entered

                                     under Rule 155.
