                    T.C. Summary Opinion 2005-129



                       UNITED STATES TAX COURT



             ROBERT E. AND LOUISE L. MUMY, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18976-04S.             Filed August 24, 2005.


     Harland M. Britz, for petitioners.

     Bryan E. Sladek, for respondent.



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

the provisions of section 7463 of the Internal Revenue Code.

Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the year in issue, and all

Rule references are to the Tax Court Rules of Practice and

Procedure.    The decision to be entered is not reviewable by any

other court, and this opinion should not be cited as authority.
                                -2-

     Respondent determined a deficiency in petitioners’ 2002

Federal income tax of $2,164.   The sole issue for decision is

whether the amount received by petitioner Louise Mumy

(petitioner) from DaimlerChrysler, her employer, is excludable

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

     The stipulated facts and the exhibits received into evidence

are incorporated herein by reference.    At the time the petition

in this case was filed, petitioners resided in Temperance,

Michigan.

                            Background

Petitioners’ Employment

     During 2002, petitioners were full-time employees1 at a

large automobile manufacturing plant, DaimlerChrysler.   The

DaimlerChrysler plant is located in Toledo, Ohio.   Petitioner was

a secretary in the body shop.   Petitioner Robert Mumy was a

factory worker.

Petitioner’s Injuries

     Petitioner was harassed by a coworker in her workplace

starting in 1997.   The coworker made inappropriate statements to

her, stared at her, and visited her office when there was no



     1
      No explanation was given for the unemployment compensation
received during 2002 by both petitioners. Petitioner testified
that she had been continuously employed by DaimlerChrysler for 22
years. The basis for these payments, however, does not affect
the Court’s decision, as the unemployment compensation was
appropriately reported.
                                 -3-

business purpose.    DaimlerChrysler responded to petitioner’s

complaints by advising the coworker to stop bothering petitioner.

Petitioner suffered “anxiety, embarrassment and humiliation” as a

result of the harassment.

     On May 23, 2000, the same coworker pinched petitioner on her

upper arm.    Petitioner and her coworker, along with his

supervisor, were in petitioner’s office when this occurred.

Petitioner did not seek medical care for her battery.    The

incident was not reported to the police.    The pinch inflicted by

the coworker resulted in a small contusion which lasted

approximately 10 to 14 days.    This contusion was “just sore to

the touch” for a couple days.    After the coworker pinched

petitioner, DaimlerChrysler issued a written warning to the

coworker.    The coworker was later dismissed for unrelated

reasons, but was subsequently rehired.

Petitioner’s Settlement With DaimlerChrysler

     Petitioner’s complaint for damages was filed in Lucas

County, Ohio, on April 10, 2001.    The complaint alleged that she

suffered “anxiety, embarrassment, and humiliation, as well as

pain from the physical injury” as a result of the harassment.

The complaint alleged that DaimlerChrysler was responsible for

the harassment “as well as the assault and battery” on

petitioner.    The action was “brought pursuant to section 4112.99,

Ohio Revised Code, as well as Ohio common law.”    Ohio Rev. Code
                                 -4-

Ann. sec. 4112.99 (LexisNexis 2001) provides for “damages,

injunctive relief, or any other appropriate relief” for violation

of the Ohio civil rights statute.      Petitioner requested $500,000

in compensatory damages and $500,000 for punitive damages.

     In October 2002, petitioner settled her claims against

DaimlerChrysler for $12,000.    Petitioner directly accepted

$11,500 from DaimlerChrysler, and approved $500 to be paid to her

attorney.2    These amounts were paid in full settlement of any

claims by petitioner.

     The settlement agreement (agreement) referenced the

harassment, personal injury, and emotional distress allegations

in a preliminary “whereas” clause.     The agreement specifically

stated in clause 6 that “Settlement is made only to buy peace and

to compromise disputed claims, and to avoid the expense and

inconvenience of trial.”    The parties agreed that the amounts

were paid “In consideration for the Release and Covenant Not to

Sue given by Employee”.

     No allocation was made with regard to the amount of damages

paid, if any, in consideration of the pinch and for the

harassment.    DaimlerChrysler intended the agreement to encompass

“settlement of all claims”.



     2
      Despite Commissioner v. Banks, 543 U.S.    , 125 S. Ct. 826
(2005), respondent has not determined that the $500 paid to
petitioner’s attorney in October 2002 be included in petitioners’
taxable income. Therefore, the Court will not consider it.
                                  -5-

     The agreement between petitioner and DaimlerChrysler was

finalized in October 2002.    It was signed by petitioner on

October 15, 2002, and by a DaimlerChrysler agent on October 28,

2002.    By signing the agreement, petitioner agreed with the

description of her allegations in the complaint “That during

[petitioner’s] employment with Employer, she was harassed by a

fellow employee and that, as a result, she has suffered personal

injury and emotional distress.”

     The agreement specifically stated DaimlerChrysler would

issue 1099 forms, and that petitioner would hold DaimlerChrysler

harmless “With respect to withholding or any applicable income

and employment taxes in connection with the consideration paid

hereunder.”    Petitioner attested that she was given 3 weeks to

review the agreement and encouraged to seek counsel.    Petitioner

did receive legal advice3 regarding the settlement, but she did

not follow that advice.

Deficiency

     Respondent determined a deficiency in petitioners’ 2002

Federal income tax of $2,164.    Respondent received from Daimler-

Chrysler a Form 1099-MISC, Miscellaneous Income, issued to




     3
      Petitioner’s counsel for the lawsuit and settlement
negotiations with DaimlerChrysler is also representing
petitioners in this case. He recommended that petitioner not
accept the settlement.
                                -6-

 petitioner that reported the payment of income in the amount of

$11,500.4

     Petitioners did not report the $11,500 payment as income on

their Form 1040, U.S. Individual Income Tax Return, for 2002.

                            Discussion

     The Commissioner’s deficiency determinations are presumed

correct, and taxpayers generally have the burden of proving these

determinations are incorrect.   Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933).   Under certain circumstances, section

7491(a) may shift the burden to the Commissioner.   This shifting

of the burden, however, applies only where the taxpayer has

introduced such “credible evidence” regarding their liability

that, if unopposed, would show by a preponderance of the evidence

that respondent’s determination is erroneous.   Petitioners have

not introduced such evidence.   The Court decides this case on the

record before it and without regard to the burden of proof.

     Taxpayers are required, under section 61(a), to include “all

income from whatever source derived” unless such income has been

specifically excepted from inclusion.    See Commissioner v.

Glenshaw Glass Co., 348 U.S. 426, 430 (1955) (Congress’s intent

under section 61(a) was to tax unless specifically excluded).

Exclusions to section 61(a) must be narrowly construed.



     4
      A copy of the Form 1099-MISC issued to petitioner by
Daimler-Chrysler was not provided to the Court.
                                  -7-

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

States v. Burke, 504 U.S. 229, 248 (1992).)

Exclusion of Certain Damages

     Section 104(a)(2) allows taxpayers to exclude from income

“the amount of any damages (other than punitive damages) received

(whether by suit or agreement * * *) on account of personal

physical injuries or physical sickness”.     The flush language of

section 104(a) specifies that “emotional distress shall not be

treated as a physical injury or physical sickness.”

     Treasury regulations provide that this exclusion is limited

to those damages received through litigation or settlement that

are based on “tort or tort type rights.”     Sec. 1.104-1(c), Income

Tax Regs.

     Damages are excludable from income under section 104(a)(2)

if they meet the two prong test set out in Commissioner v.

Schleier, supra, that payments received in settlement be:     (1)

Received for claims “based upon tort or tort type rights,” and

(2) received “on account of personal injuries or sickness.”

Commissioner v. Schleier, supra at 335-337.     Both requirements

must be satisfied for the damages to be excluded from income.

Id. at 333.    Section 104(a)(2) was amended in 1996 to include the

requirement that damages be received for physical injuries or

sickness.     Small Business Job Protection Act of 1996, Pub. L.

104-188, 110 Stat. 1755, 1838-1839.     However, this does not alter
                                  -8-

the analysis of the Schleier test.      See Tamberella v.

Commissioner, T.C. Memo. 2004-47.

Nature of the Claim

     To determine whether the settlement payment is excludable

under section 104(a)(2) and Schleier, the Court must determine

whether the settlement amount was received for claims based upon

tort or tort type rights as well as paid “on account of” personal

physical injuries or sickness.     The nature of the claim that was

the basis of the settlement is determinative.      United States v.

Burke, supra at 237.   The “key question” to be answered is “‘In

lieu of what were the damages awarded?’”      Robinson v.

Commissioner, 102 T.C. 116, 126 (1994) (citations omitted), affd.

in part, revd. in part and remanded 70 F.3d 34 (5th Cir. 1995).

This “determination is factual and is generally made by reference

to the settlement agreement in light of the surrounding

circumstances.”   Id. (citation omitted).    Additionally, the

determination “depends on the nature of the claim” without regard

to the “validity of the claim.”     Metzger v. Commissioner, 88 T.C.

834, 847 (1987), affd. without published opinion 845 F.2d 1013

(3d Cir. 1988).   Both prongs of the Schleier test are applied in

light of the nature of the claim underlying the settlement.

United States v. Burke, supra at 234.
                                 -9-

     Tort or Tort Type Rights

     To be excludable under section 104(a)(2) and the first prong

of Schleier, the damages must have been received for “tort or

tort type rights.”   The Supreme Court in United States v. Burke,

supra at 234, stated that, for purposes of section 102(a)(2)

analysis, a tort is a “‘civil wrong, other than breach of

contract, for which the court will provide a remedy in the form

of an action for damages.’”   An action for damages is an

“essential characteristic” for a tort, as is “a broad range of

damages.”   Id. at 235 (citation omitted).

     To determine whether the damages were in fact received for

“tort or tort type rights,” the Court must look to “the nature of

the claim underlying” the settlement.    Id. at 237.   “For purposes

of section 104(a)(2), we look to state law in determining the

nature of the claim.”    Pipitone v. United States, 180 F.3d 859,

862 (7th Cir. 1999) (citing Burnet v. Harmel, 287 U.S. 103, 110

(1932)).

     Petitioner’s complaint against DaimlerChrysler was based on

sec. 4112.99 of the Ohio Revised Code and Ohio common law.5

Violations of Ohio’s civil rights statute are redressable through

a “civil action for damages, injunctive relief, or any other

appropriate relief.”    Ohio Rev. Code Ann. sec. 4112.99

(LexisNexis 2001).   Petitioner’s harassment claim is therefore


     5
      No specific “Ohio common law” cases were identified.
                               -10-

within the Burke definition of a tort and would satisfy the first

prong of the Schleier test.

     Additionally, Ohio Rev. Code Ann. sec. 2307.60(A) allows

“Anyone injured in person or property by a criminal act” to

“recover full damages in a civil action unless specifically

excepted by law”.   Although not cited in petitioner’s complaint,

this section governs civil actions for assault or battery.

Additionally, Ohio Rev. Code Ann. sec. 2307.60(B)(1) (LexisNexis

2005), defines a “tort action” as a “civil action for damages for

injury, death, or loss to person or property other than a civil

action for damages for a breach of contract or another agreement

between persons.”   Petitioner’s claim for assault based on the

pinch would also satisfy the Burke definition of tort, and the

first prong of the Schleier test.

     Therefore, whether the settlement was based on the

harassment or the assault claims, petitioner’s damages were

received “for claims based upon tort or tort type rights,” as

Ohio law provides for damages for violations of the Ohio civil

rights statute and for injuries resulting from a criminal act.

The first prong of the Schleier test is satisfied.

     Personal Physical Injuries or Physical Sickness

     To be excludable under section 104(a)(2) and the second

prong of the Schleier test, the damages must have been received

“on account of personal physical injuries or physical sickness.”
                                -11-

This analysis is also guided by the “nature of the claim

underlying” the settlement.    United States v. Burke, supra at

237.    The question before us is whether the damages paid to

petitioner by DaimlerChrysler were for a personal physical

injury.

       Petitioner’s complaint alleged that she suffered “anxiety,

embarrassment and humiliation,” as a result of the harassment,

and pain from the pinch.    However, “mental anguish, humiliation,

and embarrassment are not personal physical injuries or physical

sickness * * * but are most akin to emotional distress.”     Shaltz

v. Commissioner, T.C. Memo. 2003-173.     Anxiety is also part of

emotional distress.    7 Restatement, Torts 2d, sec. 905 (1979).

Under the flush language of section 104, damages resulting from

emotional distress are not excludable from income.    Therefore, if

the damages paid to petitioner are to satisfy the second prong of

Schleier, they must have been paid solely as a result of the

pinch.

       The mere mention of a physical injury in a complaint does

not determine the nature of the claims.     Emerson v. Commissioner,

T.C. Memo. 2003-82.    In the case before the Court, the agreement

referenced the harassment, personal injury, and emotional

distress allegations, albeit in a preliminary “whereas” clause.

The document, however, does not contain any language which

specifically states that the amount paid was to settle the
                                -12-

harassment claim, the emotional stress claim, or the assault and

battery claim.    Rather, the parties agreed that the amount was

paid “In consideration for the Release and Covenant Not to Sue

given by Employee”.    The parties also agreed that the “Settlement

is made only to buy peace and to compromise disputed claims, and

to avoid the expense and inconvenience of trial.”

     The nature of the underlying claims cannot be determined by

a general release that is broad and inclusive.    Taggi v. United

States, 835 F. Supp. 744, 746 (S.D.N.Y. 1993), affd. 35 F.3d 93,

96 (2d Cir. 1994).    Such a release was included in the agreement

in the case before the Court.    The agreement released Daimler-

Chrysler and all related entities from “any and all known or

unknown grievances, disputes, actions, causes of action; * * *

claims at law or in equity, or sounding in contract * * * or

tort, arising under common law, any federal, state or local

statute or ordinance”.    This release included age discrimination,

disability discrimination, any claims arising from title VII of

the Civil Rights Act of 1964, as well as claims regarding wages

and overtime and health insurance coverage.

     Where the agreement does not address “what portion, if any,

of a settlement payment should be allocated towards damages

excludable under * * * [section 104(a)(2)], the courts will not

make that allocation for the parties.”    Taggi v. United States,

supra at 746.    If the “settlement agreement lacks express
                               -13-

language” regarding what the payment was for, “then the most

important fact in determining how section 104(a)(2) is to be

applied is ‘the intent of the payor’ as to the purpose in making

the payment.”   Metzger v. Commissioner, 88 T.C. at 847-848

(quoting Knuckles v. Commissioner, 349 F.2d 610, 613 (10th Cir.

1965), affg. T.C. Memo. 1964-33); see also Whitehead v.

Commissioner, T.C. Memo. 1980-508 (general release found to

indicate that payor “regarded the settlement payment as

compensation for all of the claims which may have been brought by

petitioner rather than as compensation for one particular type of

claim.”).

     In the case before us, the intent of the payor is evidenced

in trial testimony and the agreement.   The DaimlerChrysler

counsel with settlement authority for petitioner’s claims, and

who executed the settlement for DaimlerChrysler, testified at

trial.   DaimlerChrysler did not allocate the payment between the

causes of action in the agreement but rather intended the

agreement to encompass “settlement of all claims.”   In the

agreement, DaimlerChrysler specifically referenced the Forms 1099

that would be issued regarding the payments, as well as the

“withholding or any applicable income and employment taxes in

connection with the consideration paid”.   Id. (emphasis added).

By referring to the income and employment taxes, the Forms 1099,

and their intention that the agreement include settlement of all
                               -14-

claims without specific allocation to any particular claim,

DaimlerChrysler demonstrated that its purpose for the payment was

not as damages on account of physical injury or physical

sickness.

     The ultimate character of the proceeds depends on the

payor’s “dominant reason” for making the payment.     Commissioner

v. Duberstein, 363 U.S. 278, 286 (1960); accord Agar v.

Commissioner, 290 F.2d 283, 284 (2d Cir. 1961), affg. per curiam

T.C. Memo. 1960-21.   Petitioner did not file her lawsuit against

DaimlerChrysler until after the pinch.   Instead of the pinch

being the basis for a separate and stand-alone cause of action,

however, the complaint treats the pinch as a symptom of the

harassment.   Similarly, the agreement also references the

“personal injury” as resulting from the harassment.

     From the evidence, the Court concludes that it was not

DaimlerChrysler’s intention to compensate petitioner for the

physical injury, in other words, the pinch.    Rather, their

purpose and intention was to compensate for the primary cause of

action stated by petitioner in her complaint, the harassment.

The Court “must consider the entire amount taxable” when the

agreement settles claims for different types of damages, does not

allocate the damages, and “there is no other evidence that a

specific claim was meant to be singled out.”    Morabito v.

Commissioner, T.C. Memo. 1997-315.    The Court finds that the
                              -15-

settlement amounts were not paid “on account of personal physical

injuries or sickness,” Commissioner v. Schleier, 515 U.S. at 337,

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

Conclusion

     Respondent’s determination that the settlement payment is

includable in petitioners’ income for 2002 is sustained.

     Reviewed and adopted as the report of the Small Tax Case

Division.


                                          Decision will be entered

                                     for respondent.
