                   T.C. Summary Opinion 2007-51



                     UNITED STATES TAX COURT



    THOMAS ANDREW AND DIANE KOERNER CAMPBELL, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7830-05S.              Filed March 28, 2007.



     Thomas Andrew and Diane Koerner Campbell, pro se.

     Scott A. Hovey, for respondent.



     POWELL, Special Trial Judge:   This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect when the petition was filed.1   Pursuant to section

7463(b), the decision to be entered is not reviewable by any



     1
         Unless otherwise indicated, subsequent section
references are to the Internal Revenue Code of 1986, as amended
and in effect for the year in issue, and Rule references are to
the Tax Court Rules of Practice and Procedure.
                                - 2 -

other court, and this opinion shall not be treated as precedent

for any other case.

     Respondent determined a deficiency of $701 in petitioners’

2002 Federal income tax.    After concessions by petitioners,2 the

issue is whether petitioners are entitled, under section

104(a)(2), to exclude from gross income a payment received by

petitioner Diane Koerner Campbell (Mrs. Campbell) from her

employer pursuant to an order of the Merit Systems Protection

Board.

     Petitioners resided in Centreville, Virginia, at the time

their petition was filed.    This case was submitted fully

stipulated under Rule 122.

                             Background

     In 1990, Mrs. Campbell was employed by the Department of

Treasury, Office of Thrift Supervision (OTS), in a supervisory

position as a grade 13, Chief, Editorial Services Branch.

     In 1990, OTS, in preparation for implementing a new pay-

banding system, standardized their then current job descriptions.

As part of this standardization, Mrs. Campbell was removed from a

supervisory position and assigned to a nonsupervisory position as

a “Writer/Editor”.    As a result of this reclassification, Mrs.


     2
         Petitioners concede they omitted $878 of interest income
from gross income and that they are liable for the additional tax
under sec. 72(t) of $54 for an early distribution from a
qualified retirement plan.
                                - 3 -

Campbell was paid under the same grade as individuals she

formerly supervised and who were previously paid at a lower

grade.

     Mrs. Campbell appealed the reclassification of her position

to the Merit Systems Protection Board (MSPB).    As the sole basis

for her appeal, Mrs. Campbell argued that because the

reclassification of her position from supervisory to

nonsupervisory resulted in a reduction in grade, OTS should have

followed the Office of Personnel Management (OPM) reduction-in-

force (RIF) procedures contained in 5 C.F.R. pt. 351 (1990), when

effecting its reorganization.   Mrs. Campbell argued that because

OTS did not follow the RIF regulations, the MSPB should vacate

the agency action and award her compensatory damages, including

lost wages and benefits she would have been entitled to had she

retained her position.   Mrs. Campbell did not raise any other

basis for relief from the adverse agency action with the MSPB.

     On February 28, 1994, the MSPB issued a final order (the

Order) resolving Mrs. Campbell’s dispute with OTS.   In the Order,

the MSPB found that Mrs. Campbell was demoted as a result of

OTS’s reclassification of her position and that Mrs. Campbell’s

demotion constituted an appealable RIF action.   The MSPB found

that because OTS did not follow the RIF regulations in effecting

Mrs. Campbell’s demotion, the demotion could not be sustained.

Based on these findings, the MSPB ordered OTS to cancel Mrs.
                                - 4 -

Campbell’s demotion and to restore her to her previous position

effective December 12, 1990.    The MSPB further ordered OTS to

issue a check to Mrs. Campbell “for the appropriate amount of

back pay, interest on back pay, and other benefits under the

Office of Personnel Management’s regulations”.

     Prior to the date the Order was issued by the MSPB, Mrs.

Campbell transferred employment first to the General Services

Administration (GSA) and then to the Federal Deposit Insurance

Corporation (FDIC).   As a result of these transfers, the Federal

Government was required to satisfy its obligations under the

Order from separate agency funds.    Mrs. Campbell received

payments under the Order from OTS, GSA, and the FDIC.

     At some point not disclosed in the record, Mrs. Campbell

disputed whether payments from the FDIC reflected the total

amount the agency was obligated to pay her under the Order.     In

2002, the FDIC and Mrs. Campbell agreed that she was due a final

payment of $1,446 under the Order.      Thereafter, the FDIC issued a

check in that amount to Mrs. Campbell and reported the payment to

petitioners and respondent on a Form 1099-MISC, Miscellaneous

Income.   The FDIC did not withhold FICA tax, Federal income tax,

or State income tax from the gross amount of the payment.

     Petitioners did not include the $1,446 payment from the FDIC

in gross income on their timely filed 2002 Form 1040, U.S.

Individual Income Tax Return.    Respondent determined that the
                                 - 5 -

$1,446 payment from the FDIC should have been included in

petitioners’ 2002 gross income and increased petitioners’ taxable

income by that amount to reflect the payment.       Petitioners assert

the payment, which represents “compensatory damages resulting

from the litigation of a constitutional tort (unlawful

demotion)”, is excludable from gross income under section

104(a)(2).

                             Discussion

     Section 61 provides that “gross income means all income from

whatever source derived”.    Gross income is an inclusive term with

broad scope, designed by Congress to “exert * * * ‘the full

measure of its taxing power.’”     Commissioner v. Glenshaw Glass

Co., 348 U.S. 426, 429 (1955) (quoting Helvering v. Clifford, 309

U.S. 331, 334 (1940)).    Compensation for services is enumerated

among the items of income included under section 61, as is

interest.    Sec. 61(a)(1), (4); secs. 1.61-2(a)(1), 1.61-7(a),

Income Tax Regs.

     Statutory exclusions from income are matters of legislative

grace and are narrowly construed.        Commissioner v. Schleier, 515

U.S. 323, 328 (1995); Mostowy v. United States, 966 F.2d 668, 671

(Fed. Cir. 1992).    Further, “exemptions from taxation are not to

be implied; they must be unambiguously proved.”       United States v.

Wells Fargo Bank, 485 U.S. 351, 354 (1988).       Taxpayers seeking an

exclusion from income must demonstrate they are eligible for the
                                - 6 -

exclusion and bring themselves “within the clear scope of the

exclusion.”    Dobra v. Commissioner, 111 T.C. 339, 349 n.16

(1998).3

     Section 104(a)(2), as in effect prior to its amendment in

1996,4 excludes from gross income “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., defines “damages received” as “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.”

     For purposes of applying the above statutory and regulatory

text, the Supreme Court has established a two-pronged test for

ascertaining a taxpayer’s eligibility for the section 104(a)(2)

exclusion:    “First, the taxpayer must demonstrate that the

underlying cause of action giving rise to the recovery is ‘based

upon tort or tort type rights’; and second, the taxpayer must


     3
         Because we decide the issue in this case without regard
to the burden of proof, sec. 7491 is inapplicable.
     4
         Sec. 104(a)(2) was amended by the Small Business Job
Protection Act of 1996, Pub. L. 104-188, sec. 1605, 110 Stat.
1755, 1838-1839, to exclude only amounts received on account of
personal physical injuries or physical sickness. We apply the
statute as in effect prior to the amendment because the Order,
pursuant to which the payment at issue was made, was issued by
the MSPB before Sept. 13, 1995. See id. sec. 1605(d)(2), 110
Stat. 1839.
                                 - 7 -

show that the damages were received ‘on account of personal

injuries or sickness.’”     Commissioner v. Schleier, supra at 337;

see also Hemelt v. United States, 122 F.3d 204, 208 (4th Cir.

1997) (quoting above passage from Schleier as the “basic test

* * * for determining whether an award may fairly be

characterized as personal injury damages” that fall within the

section 104(a)(2) exclusion).5

     In the instant case, petitioners make a series of arguments

to support their assertion that the backpay and interest on the

backpay awarded by the MSPB are really an award of damages for a

personal injury suffered by Mrs. Campbell as a result of her

“unlawful demotion”.   Primarily, they argue that, based on United

States v. Burke, 504 U.S. 229 (1992), when damages are awarded, a

taxpayer need only prove that the underlying claim was based on

“tort or tort type rights” for the damages to be excludable under

section 104(a)(2).   In such a case, according to petitioners,

there is no need for a discussion of whether the requirements of

personal injury were met.    Because Mrs. Campbell’s “unlawful

demotion” was a tort, which petitioners alternatively

characterize as a “workplace”, an “abuse of process”, and a


     5
         Interest received on damage awards must be included in
gross income under sec. 61, even under circumstances in which the
underlying damages are excludable under sec. 104(a)(2). Rozpad
v. Commissioner, 154 F.3d 1 (1st Cir. 1998), affg. T.C. Memo.
1997-528; Brabson v. United States, 73 F.3d 1040 (10th Cir.
1996); Kovacs v. Commissioner, 100 T.C. 124 (1993), affd. without
published opinion 25 F.3d 1048 (6th Cir. 1994).
                              - 8 -

“public policy” tort, and that tort caused a reduction in pay,

all damages received “on account of” that tort by Mrs. Campbell

are excludable from income under section 104(a)(2), as it existed

pre-1996.

     Respondent disputes petitioners’ characterization of Mrs.

Campbell’s demotion without benefit of the RIF regulations as a

tort and argues that because the only remedy available to an

employee for an agency’s violation of the RIF regulations is

reinstatement and appropriate backpay, her cause of action

against OTS was not based on “tort or tort type rights” under the

definition enunciated by the Supreme Court in Commissioner v.

Schleier, supra, and United States v. Burke, supra.   Respondent

further argues that, assuming that Mrs. Campbell’s claim against

OTS was based on tort or tort type rights, the ordered

restoration of her former pay grade coupled with back wages and

lost benefits was not awarded on “account of personal injuries or

sickness”, within the meaning of section 104(a)(2), as

interpreted by the Supreme Court.

     We agree with respondent that the backpay and the interest

on the backpay awarded by the MSPB were not attributable to any

personal injuries or sickness suffered by Mrs. Campbell.   Because

we find that the payment in question was not received by Mrs.

Campbell “on account of personal injuries or sickness”, as

required by section 104(a)(2) and the second prong of the Supreme
                              - 9 -

Court’s test in Commissioner v. Schleier, supra at 337, we need

not decide whether the underlying claim giving rise to the award,

i.e., OTS’s violation of the RIF regulations in effecting Mrs.

Campbell’s demotion, involved tort or tort type rights.6

     In deciding whether damages were received “on account of

personal injuries or sickness”, the Supreme Court has construed

section 104(a)(2) to require that a damage award be more than



     6
         For the sake of completeness, we note that petitioners’
contention that, under the Supreme Court’s opinion in United
States v. Burke, 504 U.S. 229 (1992), a taxpayer need prove only
that the claim underlying a damage award was based on “tort or
tort type rights” for the award to be excludable under pre-1996
sec. 104(a)(2), was expressly rejected by the Supreme Court in
Commissioner v. Schleier, 515 U.S. 323, 336 (1995):

     Second, and more importantly, the holding of Burke is
     narrower than * * * [the taxpayer] suggests. In Burke,
     following the framework established in the Internal
     Revenue Service regulations, we noted that § 104(a)(2)
     requires a determination whether the underlying action
     is “based upon tort or tort type rights.” * * * In so
     doing, however, we did not hold that the inquiry into
     “tort or tort type rights” constituted the beginning
     and end of the analysis. In particular, though Burke
     relied on Title VII’s failure to qualify as an action
     based upon tort type rights, we did not intend to
     eliminate the basic requirement found in both the
     statute and the regulation that only amounts received
     “on account of personal injuries or sickness” come
     within § 104(a)(2)’s exclusion. Thus, though
     satisfaction of Burke’s “tort or tort type” inquiry is
     a necessary condition for excludability under §
     104(a)(2), it is not a sufficient condition. [Fn. ref.
     omitted.]

Thus, contrary to petitioners’ argument, both elements of the
Schleier test must be satisfied in order for the sec. 104(a)(2)
exclusion to apply. Commissioner v. Schleier, supra at 337;
United States v. Burke, supra at 233.
                               - 10 -

only proximately caused by tortious conduct; it must also be

directly causally related to personal injuries.    Commissioner v.

Schleier, supra at 329-330; see also O’Gilvie v. United States,

519 U.S. 79 (1996).    In other words, the mere fact that a

taxpayer suffers a “personal” injury from a defendant’s conduct

is insufficient to satisfy the “on account of personal injuries

or sickness” test; only recovery that is “attributable to” such

personal injury is excludable from gross income.    Commissioner v.

Schleier, supra at 330-331.    As interpreted by the Supreme Court,

the phrase “on account of” imposes a “stronger causal

connection,” thereby making section 104(a)(2) “applicable only to

those personal injury lawsuit damages that were awarded by reason

of, or because of, the personal injuries.”    O’Gilvie v. United

States, supra at 83.

     In the instant case, Mrs. Campbell’s only claim against OTS

was that OTS did not follow the RIF regulations in effecting her

reduction in grade (i.e., her demotion).    On appeal to the MSPB,

her requested relief from OTS’s violation of the RIF regulations

was for OTS’s action reclassifying her position to be vacated and

for an award of compensatory damages including the lost wages and

benefits she would have been entitled to had she retained her

original position.    The MSPB agreed with Mrs. Campbell and

ordered OTS to cancel Mrs. Campbell’s demotion and restore her to

her former position effective December 12, 1990, and to issue a
                                - 11 -

check to Mrs. Campbell for the appropriate amount of backpay and

interest on the backpay.    There is no evidence in the record that

Mrs. Campbell alleged to OTS or to the MSPB that she suffered any

personal injuries or sickness as a result of OTS’s violation of

the RIF regulations in effecting her demotion, nor is there any

evidence that the MSPB awarded her damages attributable to such

personal injuries or sickness.    Accordingly, we cannot say that

the MSPB awarded Mrs. Campbell backpay and interest thereon “by

reason of, or because of, * * * personal injuries.”     O’Gilvie v.

United States, supra at 83.

     We recognize that, in some cases, damages measured by lost

wages can satisfy the second prong of the test in Commissioner v.

Schleier, supra, because they are awarded “on account of”

personal injuries or sickness.    For example, if a taxpayer was

out of work for a time as a direct result of injuries, the

economic damages received to replace the wages lost during that

time would be excludable.     Commissioner v. Schleier, supra at

329-331.   This, however, is not the case for Mrs. Campbell.     The

MSPB did not compensate Mrs. Campbell for wages she lost as a

result of missing work due to any personal injuries or sickness.

Rather, the award of backpay and interest on backpay ordered by

the MSPB replaced the pay and benefits Mrs. Campbell lost due to

her demotion without the benefit of the RIF regulations.    As

such, the award of backpay and interest on backpay was not
                             - 12 -

received by Mrs. Campbell on account of personal injuries or

sickness within the meaning of section 104(a)(2).

                           Conclusion

     We hold that the $1,446 payment made by the FDIC to Mrs.

Campbell pursuant to the Order is not excludable under section

104(a)(2) and, thus, respondent’s determination is sustained.    In

so holding, we have considered all of petitioners’ arguments and,

to the extent not discussed above, conclude that they are without

merit or are irrelevant.

                                   Decision will be entered

                              for respondent.
