                          T.C. Memo. 1998-357



                        UNITED STATES TAX COURT



                CLARENCE D. KIGHTLINGER, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 13890-97.              Filed October 5, 1998.




        R. Wyatt Mick, Jr., for petitioner.*

        Timothy S. Sinnott, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION


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

the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.1


     * Briefs amicus curiae were filed by Robert W. Mysliwiec, on
behalf of Wayne E. and Judith A. Ellis, and by Mary A. Bridwell.
                                                   (continued...)
                                - 2 -


     Respondent determined a deficiency in petitioner's Federal

income tax for the taxable year 1993 in the amount of $1,882, as

well as an accuracy-related penalty under section 6662(a) for

negligence or intentional disregard of rules or regulations in

the amount of $376.

     After a concession by respondent,2 the only issue for

decision is whether petitioner may exclude from gross income

under section 104(a)(2) the settlement proceeds that he received

during the year in issue.    We hold that petitioner may not

exclude such proceeds under section 104(a)(2).

                         FINDINGS OF FACT

     Some of the facts have been stipulated, and they are so

found.   Petitioner resided in Mishawaka, Indiana, at the time

that his petition was filed with the Court.

     Petitioner was employed by Whitehall Laboratories, Inc.

(Whitehall) in Elkhart, Indiana, from August 1986 through some

time in 1990 or 1991.   Whitehall was a subsidiary of American

Home Products Corp. (AHP).    Wyeth-Ayerst Laboratories was a

division of AHP.



(...continued)
     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable year in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
     2
       Respondent concedes that petitioner is not liable for the
accuracy-related penalty under sec. 6662(a).
                                 - 3 -


     While employed at Whitehall, petitioner was a member of a

labor union named the Oil, Chemical and Atomic Workers

International Union (the Union).

     During the 1980's, AHP initiated a plan to relocate part of

its operations to Guayama, Puerto Rico.    As a result of this

plan, AHP closed various plants operated by Whitehall and Wyeth-

Ayerst, including the plant operated by Whitehall in Elkhart, by

the end of 1991 or early 1992.    The plant closings caused

approximately 1,100 Whitehall and Wyeth-Ayerst employees to be

laid off and eventually lose their jobs.    Petitioner was one such

individual.

     In January 1991, the Union filed suit against AHP and

various other entities and individuals in the United States

District Court for the District of Puerto Rico (the District

Court).   During that same year, the Union determined that a class

action should be brought against AHP and other defendants on

behalf of the employees that were laid off.    Consequently, in

November 1991, the Union sent a notice entitled "Keep Whitehall

Open" to the affected Whitehall employees.    The notice stated

that it had become appropriate to seek individual damages for the

laid off members of the Union "under the RICO [Racketeer

Influenced and Corrupt Organization] complaint".    The notice

provided further as follows:

     the remedy that we would be asking for [is]
     compensation for losses in wages and benefits for some
                                 - 4 -


     appropriate period of time but not less than the
     duration of the current contract * * *.

     In February 1992, the Union, its local chapter, and several

individuals (the Plaintiffs) filed a class action against AHP and

various other individuals and entities (the Defendants) in the

District Court.   The class action complaint (the Complaint)

stated in its preliminary statement that the Defendants:

     did unlawfully and without justification violate federal
     Racketeering laws and intentionally interfere with the
     protected right of Plaintiffs, including the prospective
     economic advantages, enjoyed by the herein described class
     of former Elkhart * * * employees.

     The Complaint identified several individual plaintiffs as

typical class representatives.    An example of a paragraph

identifying an individual class member is as follows:

          Defendants' decision to relocate and transfer jobs to
     Puerto Rico has caused [individual class representative] a
     great personal loss consisting of his being terminated in
     December, 1989. [Individual class representative] has since
     found no steady work and is forced to maintain temporary
     employment with no medical benefits. Defendants' actions,
     which provoked his unemployment, caused him great emotional
     distress, feelings of low self esteem and self worth.
     [Individual class representative] now earns much less and
     lost fringe benefits due to his being terminated by
     Defendants.

     Other individual class representatives were similarly

identified.   The Complaint alleged factually in great detail that

the Defendants, in the course of a scheme reasonably calculated

to defraud the plaintiffs, to evade State and Federal taxes, and

to avoid compliance with various other Federal and Puerto Rican

laws, violated Federal racketeering laws and interfered with the
                                 - 5 -


Plaintiffs' economic advantage.    All of the factual allegations

revolved around the Defendants' wrongdoing in violations of the

above-mentioned laws.   There were no factual allegations

regarding any personal injury.

     The Plaintiffs based their claims on four counts consisting

of two separate counts for RICO Act violations, one count for

unlawful interference with prospective economic advantage, and

one count for punitive damages.    As required by the RICO Act, the

two counts for RICO Act violations alleged injury to the

Plaintiffs' business and property.       Under the count for unlawful

interference with prospective economic advantage, the Plaintiffs

alleged that the Defendants' actions interfered with the rights

of the Plaintiffs to "enjoy the fruits and advantages of their

industries and efforts as employees". (Emphasis added.)3

Finally, by their count for punitive damages, the Plaintiffs

claimed that the Defendants' negligent conduct caused "severe

economic and financial harm as well as other damages" to the

Plaintiffs.   No mention was made of any physical or emotional

injury under any of the four counts.

     Pursuant to the class action, all AHP employees affected by

AHP's relocation to Guayama, Puerto Rico, received a legal notice

of class action.   Petitioner was a member of this class action

     3
        Not relevant here, the class action also alleged
interference with the Union's right to receive dues income from
its members.
                              - 6 -


and received the above-mentioned notice.   The notice of class

action summarized the underlying class action as follows:

     Plaintiffs allege in their complaint that Private
     Defendants, who in the course of a scheme reasonably
     calculated to deceive Plaintiffs and to evade state and
     federal taxes, to avoid compliance with various other
     federal and Commonwealth laws and regulations, and to
     relocate jobs from a state of the United States * * * to
     Guayama, Puerto Rico, and who acting in concert with its
     corporate officers and agents of the Commonwealth of Puerto
     Rico, did unlawfully and without justification violate
     federal Racketeering laws and intentionally interfere with
     the protected rights of Plaintiffs, including the
     prospective economic advantages, enjoyed by the herein
     described class of former * * * employees. Plaintiffs
     further allege that as a direct result of AHP's scheme to
     relocate its production facilities to Guayama, Puerto Rico
     to take advantage of tremendous tax savings, AHP caused
     workers to lose jobs, to be downgraded in their employment
     and/or to take early retirement, all of which caused
     substantial economic damages to members of the plaintiff
     class. Plaintiffs in this class action lawsuit seek to
     recover, on behalf of themselves and all other similarly
     situated workers, for the economic harm losses resulting
     from AHP's relocation to Puerto Rico, and the related events
     occurring thereafter. [Emphasis added.]

     The notice of class action further stated:

          If you want to participate in this class action lawsuit
     and thereby made a claim for economic loss resulting from
     AHP's alleged wrongful relocation of pharmaceutical
     production jobs to Guayama, Puerto Rico, you need do
     nothing. [Emphasis added.]

              *     *     *     *     *      *     *

          If you have any claims for damages arising out of AHP's
     relocation of production to Guayama, Puerto Rico that [are]
     not employment-related economic harms, these claims are not
     included in this class action. Examples of economic harm
     included in this class action are lost wages or lost salary,
     lost health care and/or retirement benefits.
                                 - 7 -


     In July 1992, the parties reached a settlement without

trial.    Thereupon, the parties filed a joint stipulation of

settlement with the District Court.      Pursuant to this joint

stipulation of settlement, AHP agreed to pay $24 million in full

satisfaction of all of the claims brought against it in the class

action.    The joint stipulation of settlement did not allocate the

settlement proceeds for any particular claim.      However, the

proceeds were allocated among court-approved expenses, class

counsel, the Union, and class members.      The joint stipulation of

settlement provided guidelines pursuant to which an independent

trustee would determine the appropriate amount to compensate

individual class members for their demonstrated employment-

related economic harm.    Pursuant to this stipulation, economic

harm was to be measured based upon factors such as age, duration

of employment with the company, salary history, and subsequent

employment history, including the date of new employment and

salary history.    Noneconomic injury was not a factor to be

considered in the independent trustee's allocation of the

recovery to the class members.

    Subsequently, class members, including petitioner, received a

notice of proposed settlement and settlement hearing.      The notice

of proposed settlement reiterated that the lawsuit sought to

recover for harm resulting from the Defendants' violation of the

RICO Act and interference with the class members' prospective
                               - 8 -


economic advantages as employees.   The notice of proposed

settlement then informed the class members regarding the method

selected to compensate individual class members for their

demonstrated economic harm arising from the loss of their

employment.   Individual class members were given the option to

exclude themselves from the proposed settlement for any reason,

including the possibility that their claim was more expansive

than one for employment-related economic loss.

     Individual class members were required to submit a proof of

claim and release to the independent trustee to claim a portion

of the recovery.   The proof of claim and release form was

designed to measure each individual class member's degree of

employment-related economic harm.   The form inquired as to the

individual class member's age, years of service with AHP, job

classification at the time of separation, whether the individual

was bumped down before separation, whether the individual

received severance pay at the time of separation, how the

individual's current benefits differed from those received at

AHP, and the individual's current sources of income.   No inquiry

was made as to whether an individual class member had suffered

any physical or emotional injury.

     Petitioner claimed entitlement to a portion of the class

action recovery and stated in his proof of claim as follows:
                                 - 9 -


          The economic damages that I have suffered since my
     termination from Whitehall Lab. in Elkhart has had a
     devastating hardship on my financial future and security.

          Since losing my job, I have had to withdraw all my
     savings and cash in securities that I had put aside for my
     retirement years.

          When I was hired at Whitehall Lab. in Elkhart in August
     of 1986, I felt as though I had secured my future with the
     good wages I would be able to make during my years until
     retirement. Also I felt as though I would have good
     retirement benefits secured for my "golden years". I knew
     if I were given a chance to work at this facility for the
     future 27 to 30 years, I would be in a good position with
     full pension and medical benefits.

          Currently I am working at a job that pays less than 50%
     of the wages I made at Elkhart's Whitehall Lab.

          In moving the facility to Puerto Rico the results were
     that I was one of over 800 plus workers whose life has
     changed. Leaving me with an insecure future, and with the
     possibility that I will never have the financial security
     that I had while employed at Whitehall.

     Petitioner may have suffered some depression as a result of

being laid off.   However, petitioner did not consult with a

doctor for any such condition.    Petitioner did not claim any

emotional or physical injury and did not opt out of the

settlement agreement to pursue a claim for personal injury or

otherwise.

     A final order and judgment in the class action was entered

in September 1992.   In that document, the District Court approved

the joint stipulation of settlement filed by the parties.    The

District Court retained jurisdiction solely for the purpose of

ensuring proper administration of the settlement proceeds.
                              - 10 -


     Subsequently, a "motion for distribution of notice and

release form" was filed by the Plaintiffs.   The motion outlined

the independent trustee's determination of the method for the

allocation of the funds among the individual class members.

Pursuant to the guidelines in the joint stipulation of

settlement, the independent trustee considered factors such as

age, years of seniority, and the amount of severance pay

received.   Some of the independent trustee's findings, as

pertaining to petitioner,4 are as follows:

          Since some terminated employees received up to two
     weeks severance and others received less, the first priority
     will be to distribute the settlement funds to bring each
     qualified claimant up to two weeks of severance pay for each
     full year of seniority. Any remaining funds will be
     distributed mainly to terminated employees who did not
     transfer or receive ERIP [early retirement incentive
     program] on the basis of the following point system:

     [The point system allocated points based on: (1) Age,
     increasing from age 25 to age 51 and decreasing from age 51
     and up; and (2) years of service, increasing per year of
     service.]

              *     *     *     *      *     *    *

          The rationale for basing this point system on seniority
     and age is that workers who were near retirement age when
     they were terminated were not damaged as much as younger
     workers, (50, say) who probably will have more years of
     lower-paying work or unemployment than a 58-year-old worker
     who was closer to retirement. Similarly, young workers

     4
        Pursuant to the joint stipulation of settlement,
claimants were divided into different priority groups. The group
with the top priority included ex-employees who were terminated
without transfer of benefits under an early retirement incentive
program (ERIP). Petitioner was a member of this group inasmuch
as ERIP was not available to any of the Union members.
                             - 11 -


     (say, at age 25) are assumed to suffer less damage than
     older workers, who have greater difficulty finding
     comparable jobs. The distribution formula therefore
     reflects pension eligibility, as well as age and seniority.

     Thereafter, in December 1993, the District Court ordered the

disposition of the settlement proceeds to individual class

members pursuant to the independent trustee's allocations (except

for some minor changes not relevant here).    In the same order,

the District Court noted:

          Finally, the Court has received some correspondence
     from class members expressing concern regarding the
     taxability of their settlement awards. One particular class
     member * * * suggests that twenty percent (20%) of the
     payment amount be withheld for the purpose of satisfying
     federal income taxes. At this time the Court makes clear
     that there will be no withholding of funds from the
     settlement award to class members for tax purposes. This
     was not a lawsuit about lost wages. Therefore, each member
     shall be responsible for taxes based on their particular
     situation. [Emphasis added.]

     Petitioner received his portion of the recovery from the

class action, $12,057.45, in December 1993.    On his 1993 return,

petitioner did not include this amount in gross income, claiming

exemption under section 104(a)(2).    In April 1994, respondent

informally notified class members, such as petitioner, that the

settlement proceeds were not excludable from gross income under

section 104(a)(2).

     In March 1995, pursuant to a request by the Plaintiffs, the

District Court issued another order.    In that order, the District

Court found that the class action: (1) Involved tort-like claims

arising from allegations of wrongful conduct and was not about
                               - 12 -


lost wages; and (2) involved personal injury-like claims for

emotional distress as evidenced from the pleadings.    The Court

stated that it "was closely involved with the settlement, and

would allocate the total settlement to such tort-like claims and

remedies."

      In April 1997, respondent issued the notice of deficiency

involved herein.    In the notice of deficiency, respondent

determined that petitioner was not entitled to an exemption under

section 104(a)(2) and included petitioner's recovery in gross

income for 1993, the year of its receipt.

                               OPINION5

1.   General Discussion of Section 104(a)(2)

      Except as otherwise provided, gross income includes income

from all sources.    Sec. 61(a); Commissioner v. Glenshaw Glass

Co., 348 U.S. 426 (1955).    Although section 61(a) is to be

broadly construed, statutory exclusions from income are narrowly

construed.   Commissioner v. Schleier, 515 U.S. 323, 336-337

(1995); United States v. Burke, 504 U.S. 229, 233 (1992); Kovacs

v. Commissioner, 100 T.C. 124, 128 (1993), affd. per curiam

without published opinion 25 F.3d 1048 (6th Cir. 1994).




      5
        As previously noted, briefs amicus curiae were filed by
or on behalf of taxpayers similarly situated to petitioner. In
addressing petitioner's contentions we have also considered the
contentions made by the amici curiae.
                                - 13 -


     As an exception to the general rule under section 61(a),

section 104(a)(2) provides that gross income does not include

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

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

1.104-1(c), Income Tax Regs., provides in pertinent part:

          (c) Damages received on account of personal
     injuries or sickness. * * * The term "damages
     received (whether by suit or agreement)" means an
     amount received * * * through prosecution of a legal
     suit or action based upon tort or tort type rights, or
     through a settlement agreement entered into in lieu of
     such prosecution.

     An amount may be excluded from gross income only if it is

received both: (1) Through prosecution or settlement of an action

based upon tort or tort-type rights; and (2) on account

ofpersonal injuries or sickness.     Commissioner v. Schleier,

supra; Wesson v. United States, 48 F.3d 894, 901-902 (5th Cir.

1995); Bagley v. Commissioner, 105 T.C. 396, 416 (1995), affd.

121 F.3d 393 (8th Cir. 1997).

2.   Personal Injury

      Personal injury need not be purely physical in nature and

may include nonphysical emotional injury.       United States v.

Burke, supra; Threlkeld v. Commissioner, 87 T.C. 1294 (1986),

affd. 848 F.2d 81 (6th Cir. 1988).       In United States v. Burke,

supra at 239, the Supreme Court described the traditional harms

associated with personal injury as "pain and suffering, emotional

distress, harm to reputation, or other consequential damages
                              - 14 -


(e.g., a ruined credit rating)."   The Supreme Court distinguished

such personal injuries from "legal injuries of an economic

character" such as those arising out of the unlawful deprivation

of the opportunity to earn wages through wrongful termination.

Id.

      Consequently, damages received for lost wages in connection

with the settlement of economic rights, such as those arising out

of a breach of contract, are not excludable from income under

section 104(a)(2).   Id.; Robinson v. Commissioner, 102 T.C. 116,

126 (1994), affd. in part, revd. in part on another issue 70 F.3d

34 (5th Cir. 1995) and cases cited therein.

      Similarly, recovery for "business or property" is separate

and distinct from recovery for personal injury.    Genty v.

Resolution Trust Corp., 937 F.2d 899, 918 (3d Cir. 1991); Berg v.

First State Ins. Co., 915 F.2d 460, 464 (9th Cir. 1990); Rylewicz

v. Beaton Servs., Ltd., 888 F.2d 1175, 1180 (7th Cir. 1989); see

Reuter v. Sonotone Corp., 442 U.S. 330, 339 (1979) (holding that

the phrase "business or property" in the context of the Clayton

Act, ch. 323, sec. 4, 38 Stat. 731, 15 U.S.C. sec. 15, does not

denote physical or emotional harm to a person.)    In Zimmerman v.

HBO Affiliate Group, 834 F.2d 1163, 1169 (3d Cir. 1987), the

Court of Appeals held in this regard as follows:

           A plaintiff seeking recovery under RICO must allege
      injury "in his business or property" caused by violation of
      the Act. In Reuter v. Sonotone, 442 U.S. 330, 99 S.Ct.
      2326, 60 L.Ed.2d 931 (1979), the Supreme Court construed
                               - 15 -


     identical language from the Clayton Act on which the RICO
     statute was patterned. The Court concluded that Congress
     intended the phrase "business or property" to exclude
     personal injuries. Id. at 339, 99 S.Ct. at 2331.

     A.   The Settlement Agreement

     In the case before us, petitioner received a portion of the

recovery in a class action pursuant to a settlement agreement.

When damages are received pursuant to a settlement agreement, the

nature of the claim that was the actual basis for settlement

controls whether such damages are excludable under section

104(a)(2).    United States v. Burke, supra; Thompson v.

Commissioner, 866 F.2d 709, 711 (4th Cir. 1989), affg. 89 T.C.

632 (1987); Robinson v. Commissioner, supra.      Determination of

the nature of the claim is factual.     Bagley v. Commissioner,

supra; Stocks v. Commissioner, 98 T.C. 1, 11 (1992). "[T]he

critical question is, in lieu of what was the settlement amount

paid."    Bagley v. Commissioner, supra at 406.   Therefore, the

intent of the payor is the most important factor.      Knuckles v.

Commissioner, 349 F.2d 610, 612 (10th Cir. 1965), affg. T.C.

Memo. 1964-33; Robinson v. Commissioner, supra; Stocks v.

Commissioner, supra at 10.

     We first consider the settlement agreement in deciding the

intent of the payor in paying the settlement proceeds.     See

Robinson v. Commissioner, supra.     The joint stipulation of

settlement involved herein did not specifically allocate the
                                - 16 -


settlement proceeds for any particular claim.    However, the joint

stipulation of settlement provided that an independent trustee

would determine appropriate amounts to compensate individual

class members for their "demonstrated economic harm".    Guidelines

outlined in the joint stipulation of settlement based economic

harm on the loss or reduction of wages resulting from the loss of

employment.    Personal injury was not considered.   Therefore, the

settlement agreement indicates that the Defendants paid the

settlement proceeds on account of economic harm arising from the

deprivation of a class member's opportunity to earn wages.      Such

recovery is clearly not on account of personal injury.

     We shall not, however, limit our inquiry to the joint

stipulation of settlement.    We shall consider other factors to

ascertain the intent of the Defendants in paying the settlement

proceeds.    See Knuckles v. Commissioner, supra; Robinson v.

Commissioner, supra; Stocks v. Commissioner, supra.

     B.     The Complaint

     When payments are received pursuant to a settlement

agreement from which we cannot clearly discern why the payments

were made, the underlying complaint is normally examined as an

indicator of the payor's intent.    See Robinson v. Commissioner,

supra.    Logic dictates that defendants will ordinarily determine

their liability by taking into account the allegations made in

the complaint.     See Threlkeld v. Commissioner, supra; Church v.
                             - 17 -


Commissioner, 80 T.C. 1104 (1983).    Accordingly, the payor's

intent can be discerned from the allegations made in the

complaint.

     We must therefore consider the allegations made by class

members, such as petitioner, in the Complaint.    We observe at

this point that the mere mention of "emotional harm" in a

complaint does not, by itself, serve to exclude the recovery from

gross income under section 104(a)(2).    Clearly such a rule would

improperly expand the scope of section 104(a)(2) because the

"emotional harm" language could easily be included in every

complaint, even if such claim were only a "throwaway" claim.

     What is more, the mere fact that a taxpayer suffers

"personal" injury from a defendant's conduct is insufficient to

satisfy the "on account of personal injury or sickness" test.

Commissioner v. Schleier, 515 U.S. 323 (1995).    Only recovery

that is "attributable to" such personal injury is excludable from

gross income.   Id.

     The Supreme Court clarified the law in this regard in

Commissioner v. Schleier, supra.     In that case, the Supreme Court

distinguished the recovery that a taxpayer receives as a result

of an automobile accident from the recovery that a taxpayer

receives as a result of age discrimination under the Age

Discrimination in Employment Act (ADEA).    Whereas both

individuals may suffer emotional harm as a result of a
                                - 18 -


defendant's wrongdoing, only the accident victim's recovery can

be considered as received "on account of personal injury".     The

ADEA does not provide recovery for personal injury.      Therefore,

although the ADEA claimant may have suffered some emotional harm,

the recovery he or she received is not on account of his or her

personal injury.    Rather, the ADEA claimant's recovery is on

account of the wrongful discrimination leading to his or her

discharge.

     Similarly, the RICO Act does not provide a remedy for

personal injuries.    See Genty v. Resolution Trust Corp., supra at

918; Berg v. First State Ins. Co., supra at 464; Rylewicz v.

Beaton Servs., Ltd., supra at 1180; Grogan v. Platt, 835 F.2d

844, 847 (11th Cir. 1988); Zimmerman v. HBO Affiliate Group,

supra.    Rather, entitlement to recovery under the RICO Act is

predicated on harm to the claimant's business or property.

Rylewicz v. Beaton Servs., Ltd., supra.     Recovery for "business

or property" is separate and distinct from recovery for personal

injury.    See Rylewicz v. Beaton Servs., Ltd., supra.

     The Complaint in the class action was based on several

claims.    First, and predominantly, the Plaintiffs alleged injury

to their business and property under the RICO Act.     The factual

allegations were clearly aimed at establishing such wrongful

conduct.     In this regard, and as is the case with an ADEA

claimant, petitioner did not receive his recovery on account of
                                - 19 -


personal injury.   Rather, he received his recovery on account of

the Defendants' alleged violation of the RICO Act leading to his

discharge.   Recovery based on such allegations could only be for

injury to petitioner's business and property.     The amount of the

recovery is independent of the existence or extent of any

personal injury that petitioner may have suffered.     See

Commissioner v. Schleier, supra.

     Petitioner argues that the RICO Act was meant to expand the

remedies available to claimants and does not limit an

individual's cause of action.     Although this assertion may be

true, the Plaintiffs in the class action did not, in fact, seek

to establish any personal injury, but limited their remedy to

that provided by the RICO Act.6    Cf. United States v. Burke, 504

U.S. 229, 233 (1992) (holding that the taxpayer's recovery under

Title VII of the Civil Rights Act of 1964, Pub. L. 88-352, 78

Stat. 253, was not excludable--the underlying action not

constituting a tort-type claim--even though taxpayer had other

tort-type remedies available for the wrongful discrimination

against him.)

     Secondarily, the Complaint alleged interference with the

class members' prospective economic advantage as employees.

     6
        As we have already noted, we do not think that the
Plaintiffs actually sought to establish personal injury. The
Complaint merely mentions "emotional distress" without any
supporting factual allegations within the context of a lengthy
(90-page) and carefully drafted complaint.
                               - 20 -


Recovery for the Defendants' interference with the class members'

economic advantage as employees is similarly not on account of

personal injury.    See Commissioner v. Schleier, supra, United

States v. Burke, supra, Robinson v. Commissioner, 102 T.C. at

126.    Petitioner asserts that individual class members did not

have a direct contractual relationship with the Defendants.      Even

if such assertion is true, class members based their claim for

interference with prospective economic advantage on an

employer/employee relationship.    Their complaint sought remedy

for the Defendants' alleged wrongful interference with their

rights "to enjoy the fruits and advantages of their industries

and efforts as employees".    This is further evidenced by the

November 1991 notice to the class members, which stated:

       The remedy that we would be asking for [is]
       compensation for losses in wages and benefits for some
       appropriate period of time but not less than the
       duration of the current contract * * * [Emphasis
       added.]

       Clearly, recovery for economic injury based on such a

contractual type claim is excluded from the scope of section

104(a)(2).    See Robinson v. Commissioner, supra, and cases cited

therein.

       The Plaintiffs also sought punitive damages for the harm

suffered as a result of the Defendants' alleged wrongful conduct.

Contrary to petitioner's suggestion, the exclusion provided by

section 104(a)(2), as in effect for the year in issue, does not
                              - 21 -


apply to a recovery for punitive damages not attributable to

"physical" injury.   Specifically, section 104(a) provides that

the exclusion from gross income for damages received on account

of personal injuries "shall not apply to any punitive damages in

connection with a case not involving physical injury or physical

sickness."   The Complaint did not even mention any physical

injury, nor does petitioner claim any physical injury.

Therefore, any portion of the settlement proceeds that may be

allocated to recovery for punitive damages is outside the scope

of section 104(a)(2).

     As a final note in this regard, we refer to the manner in

which counsel for the Plaintiffs summarized the class action

Complaint in two notices sent to the class members.

Specifically, we refer to the following excerpt contained in both

notices:

          Plaintiffs in this class action lawsuit seek to
     recover, on behalf of themselves and all other similarly
     situated workers, for the economic harm losses resulting
     from AHP's relocation to Puerto Rico, and the related events
     occurring thereafter.

     Having considered the allegations made in the Complaint and

the Plaintiffs' counsels' interpretation of the class action, we

cannot find that the Defendants intended to pay class members,

such as petitioner, on account of personal injury.    Although

mention of emotional harm was made, we do not think that an

action that revolved around RICO violations and interference with
                              - 22 -


the prospective economic advantages of employees sought or

obtained redress for any of the traditional harms associated with

personal injury such as pain and suffering or emotional distress.

See United States v. Burke, supra.

     C.   Other Factors

     Other factors support respondent's contention that

petitioner's recovery was not on account of personal injury.      As

mentioned, the two notices received by petitioner clearly

describe the class action as one for the recovery of lost wages

and employment-related economic harm.    In fact, class members

were informed that claims for any harm other than employment-

related economic harm should be pursued by the class member

independently of the class action.     Petitioner did not otherwise

pursue a claim for any personal harm.    Rather, he claimed his

portion of the recovery by describing how the Defendants' actions

had economically affected him.

     Further, the independent trustee in charge of allocation of

the funds was expected to, and did, devise an arrangement

designed to compensate the class members for employment-related

economic harm.   The independent trustee allocated funds to ensure

that qualified claimants received up to 2 weeks of severance pay

for each full year of seniority.   The remaining funds were

distributed to terminated employees, such as petitioner, who did

not transfer or receive the benefit of the early retirement
                              - 23 -


incentive program.   The funds were distributed on the basis of a

point system that reflected pension eligibility, as well as age

and seniority.   The entire distribution arrangement revolved

around lost wages and retirement benefits and sought to make

class members "economically whole".

     Petitioner contends that economic loss can be used to

measure the extent of personal injury, as is the case in many

automobile accident injury cases.   In this regard, petitioner

relies on Byrne v. Commissioner, 883 F.2d 211, 215 (3d Cir.

1989), revg. 90 T.C. 1000 (1988), for the proposition that

nonpersonal consequences of a personal injury, such as loss of

future income, are often the most persuasive means of proving the

extent of the personal injury that was suffered.   We agree that

using economic loss factors as a yardstick to measure the extent

of personal injury does not necessarily bar a recovery from the

scope of section 104(a)(2).   See Bent v. Commissioner, 87 T.C.

236, 251 (1986), affd. 835 F.2d 67 (3d Cir. 1987); State Fish

Corp. v. Commissioner, 48 T.C. 465, 476-77 (1967), modified on

other grounds 49 T.C. 13 (1967).

     However, petitioner's reliance on Byrne v. Commissioner,

supra, and the accident injury cases is misplaced.   The operative

factor in these cases is that there is in fact a personal injury

and that recovery is made on account of such injury.   By

contrast, petitioner's loss of employment by the Defendants'
                              - 24 -


alleged wrongful conduct, the basis on which petitioner received

his recovery, is not a personal injury.   Cf. Commissioner v.

Schleier, 515 U.S. 323 (1995).   Further, the focus of the

settlement in the class action was to make class members, such as

petitioner, "economically whole" from the effects of their loss

of employment.   Therefore, economic factors were not merely used

as a yardstick to measure the extent of the injury; rather, they

were the harm for which petitioner received his compensation.

This is evidenced by the joint stipulation of settlement, by the

independent trustee's findings as reflected in the motion for

distribution of notice and release form, by the inquiries made in

the proof of claim form, and finally, by the proof of claim as

completed and submitted by petitioner.

     D.   The District Court's Orders

     Finally, we consider the orders issued by the District Court

in December 1993 and March 1995.   As a preliminary matter, we

observe that because res judicata and collateral estoppel are

affirmative defenses and neither was pleaded by petitioner, they

are deemed waived.7   See Rule 39; Monahan v. Commissioner, 109

     7
        We note, however, that even if petitioner had pleaded
these affirmative defenses, res judicata and collateral estoppel
would not apply if for no other reason than the characterization
of the settlement's tax consequences was not essential to the
prior proceeding. See Peck v. Commissioner, 90 T.C. 162, 166-167
(1988), affd. 904 F.2d 525 (9th Cir. 1990), setting forth the
following five conditions that must be satisfied prior to
application of issue preclusion in the context of a factual
                                                   (continued...)
                               - 25 -


T.C. 235, 250 (1997); Green v. Commissioner, T.C. Memo. 1998-274

(collateral estoppel); see also Gustafson v. Commissioner, 97

T.C. 85, 89-92 (1991) (if an affirmative defense is not pleaded,

it is deemed waived).    We do, however, consider the contents of

these orders in our factual inquiry.

     First, the December 1993 order states that the District

Court would not decide what amount should be withheld as income

tax from the recovery.   Rather, the District Court left it up to

the class members, "based on their particular situation", to

determine the amount of tax due.   Contrary to petitioner's

assertion, this order does not, on its face, establish that

petitioner's recovery is excludable under section 104(a)(2).

     The District Court's March 1995 order does, however, state

that the facts and circumstances of the class action involved

tort-like and personal injury-like claims for emotional distress.

This order also states that the District Court "was closely


     7
      (...continued)
dispute:
  (1) The issue in the second suit must be identical in all
respects with the one decided in the first suit.
  (2) There must be a final judgment rendered by a court of
competent jurisdiction.
  (3) Collateral estoppel may be invoked against parties and
their privies to the prior judgment.
  (4) The parties must actually have litigated the issues and the
resolution of these issues must have been essential to the prior
decision.
  (5) The controlling facts and applicable legal rules must
remain unchanged from those in the prior litigation.
                              - 26 -


involved with the settlement, and would allocate the total

settlement to such tort-like claims and remedies."

     We do not understand why, in light of all the contrary

evidence, the District Court issued such an order.   However,

because this order did not result from an adversary proceeding,

we find that it does not accurately reflect the realities of the

parties' settlement.   Cf. Robinson v. Commissioner, 102 T.C. 116

(1994) (the allocation in the settlement agreement approved by

the court is not controlling when the allocation itself did not

result from an adversary proceeding); Bagley v. Commissioner, 105

T.C. 396 (1995) (same); Hess v. Commissioner, T.C. Memo. 1998-240

(same).

     Although the proceedings prior to the settlement agreement

were certainly adversarial, the parties were no longer

adversaries after they reached a settlement.   More than a year

after the settlement, the Plaintiffs desired to have the

settlement payment linked to tort-type injuries received on

account of personal injuries and met with no opposition from the

Defendants.   Once the Defendants paid the settlement proceeds

they did not have any interest in how such funds were allocated.

The Plaintiffs requested the District Court to issue such an

order, and with the Defendants not objecting, the District Court

did so.
                               - 27 -


      We find, therefore, that in light of all the other facts and

circumstances, the March 1995 order does not establish that

petitioner received his recovery on account of personal injury.

3.   Tort-type Claim

      Petitioner contends that under the law for the taxable year

in issue, if recovery is received on account of a tort-type

claim, then there is no requirement that recovery be on account

of personal injury.    In this regard, petitioner relies on United

States v. Burke, 504 U.S. 229 (1992).   We disagree with

petitioner's contention, which is squarely refuted by

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

      In Commissioner v. Schleier, supra, the Supreme Court held

that even if the underlying lawsuit is tort-type, the recovery

itself must be "on account of personal injury".    Id.   Further,

the Supreme Court noted that its holding in United States v.

Burke, supra, did not imply a contrary rule.   The following

excerpt from Commissioner v. Schleier, supra at 334-336, clearly

establishes the law in this regard:

           [Appellee] also suggests that our decision in United
      States v. Burke, 504 U.S. 229 (1992), compels the
      conclusion that his settlement award is excludable. In
      Burke, we rejected the taxpayer's argument that the payment
      received in settlement of her backpay claim under the pre-
      1991 version of Title VII of the Civil Rights Act of 1964
      was excludable from her gross income. Our decision rested
      on the conclusion that such a claim was not based upon "tort
      or tort type rights" within the meaning of the regulation
      quoted above [sec. 1.104-1(c), Income Tax Regs.]. For two
      independent reasons, we think Burke provides no foundation
      for [appellee's] argument.
                               - 28 -


                  *   *    *      *     *     *     *

          Second, and more importantly, the holding of Burke is
     narrower than [appellee] 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.]

      Because the record does not establish that the settlement

recovery was attributable to any personal injury, we need not

decide whether the underlying class action was tort-type.

4.   Conclusion

      Consistent with the requirement that exclusions from income

are to be narrowly construed, we hold that the settlement

proceeds received by petitioner are not excludable from gross

income under section 104(a)(2).

      Petitioner has raised other arguments that we have

considered in reaching our decision.    To the extent that we have

not discussed these arguments, we find them to be without merit.
                             - 29 -


     To reflect our disposition of the disputed issue, as well as

respondent's concession,



                                   Decision will be entered

                              for respondent as to the

                              deficiency in tax and for

                              petitioner as to the accuracy-

                              related penalty.
