                        T.C. Memo. 2007-286



                      UNITED STATES TAX COURT



          CECIL R. AND CAROL L. HAWKINS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent




     Docket No. 22833-05.             Filed September 20, 2007.



     Cecil R. and Carol L. Hawkins, pro sese.

     Michael A. Skeen, for respondent.



                        MEMORANDUM OPINION


     LARO, Judge:   This case was submitted to the Court fully

stipulated pursuant to Rule 122.1   Petitioners petitioned the

Court to redetermine respondent’s determination of a $7,153


     1
       Rule references are to the Tax Court Rules of Practice and
Procedure. Unless otherwise noted, section references are to the
applicable versions of the Internal Revenue Code.
                                  - 2 -

deficiency in their 2003 Federal income tax and a $1,415

accuracy-related penalty under section 6662(a).     We decide

whether $25,000 received by Carol Hawkins (petitioner) in

settlement of her lawsuit (lawsuit) related to the termination of

her employment is excluded from her gross income under section

104(a)(2).   We hold it is not.

                            Background

     All facts were stipulated or contained in the exhibits

submitted with the parties’ stipulation of facts.     Those

stipulated facts and exhibits are incorporated herein by this

reference.   Petitioner and her spouse, Cecil Hawkins, filed a

joint 2003 Federal income tax return.     They resided in San

Leandro, California, when their petition was filed commencing

this proceeding.

     Petitioner was employed as an executive assistant by Alameda

County Fair Association (Alameda) from 1999 to 2002.     Shortly

after she was hired, she was told that she would receive a

one-hour paid lunch.   In May 2002, she was told that she was not

entitled to a one-hour paid lunch and that she had to repay the

wages she received from May 15, 2001, to May 15, 2002,

attributable to her lunch hours.     Petitioner refused to repay

those wages, and she was placed on administrative leave.      She was

later told that she had resigned her position even though she was

willing to continue working at Alameda.
                                 - 3 -

     Petitioner commenced the lawsuit in 2003 against Alameda and

its chief executive officer (collectively, Alameda).       She alleged

in the lawsuit, filed and prosecuted by her pro se in the United

States District Court for the Northern District of California,

that Alameda had caused her damages stemming from race

discrimination, breach of contract, breach of the covenant of

good faith and fair dealing, and harassment.   She claimed in the

lawsuit the following damages:

           Backpay                             $24,000
           Future pay                          100,000
           Emotional distress (including
             mental and physical pain
             and suffering)                       75,000
           Health benefits                           800
           Punitive and exemplary damages      300,000
                                               1
             Total                               490,800
                1
                  The claimed damages actually total $499,800
           rather than $490,800 as reported by petitioner.

     In November 2003, petitioner and Alameda agreed to settle

the lawsuit.   Under the settlement agreement, petitioner released

all claims against Alameda in exchange for a single payment of

$25,000.   The settlement agreement stated that petitioner had

filed the lawsuit against Alameda seeking “wages, penalties,

other damages, and attorneys’ fees”, that Alameda would issue

petitioner a Form 1099 in connection with its payment of the

$25,000, and that petitioner had to give Alameda a completed

Form W-9, Request for Taxpayer Identification Number and
                                - 4 -

Certification, as a condition precedent to Alameda’s paying the

$25,000 to petitioner.

     Petitioner received the $25,000 in 2003, and Alameda issued

to petitioner a 2003 Form 1099-MISC, Miscellaneous Income,

reporting its payment of that amount to her as nonemployee

compensation.   Petitioner did not report the $25,000 on her 2003

Federal income tax return.

                             Discussion

     Respondent determined that the $25,000 is included in

petitioner’s 2003 gross income.   Petitioners argue alternatively

that the $25,000 is not “income” in the context of the 16th

Amendment and that the $25,000, if income, is excluded from their

gross income under section 104(a)(2) as damages received for

emotional distress inclusive of mental pain and anguish.   In

their posttrial brief, petitioners point the Court to Murphy v.

IRS, 460 F.3d 79 (D.C. Cir. 2006), and assert that the opinion

there controls this case.    In Murphy, a panel of the Court of

Appeals for the D.C. Circuit held that section 104(a)(2) violated

the 16th Amendment insofar as it permitted the taxation of an

award of damages for mental distress and loss of reputation.      The

opinion reasoned that damages awarded to the taxpayer for mental

pain and anguish were not received in lieu of something normally

taxed as income, nor were they income within the meaning of the

16th Amendment.
                                 - 5 -

     Without regard to which party bears the burden of proof, we

find and hold that the $25,000 is income to petitioner and that

none of the $25,000 constitutes damages received “on account of

personal physical injuries or physical sickness” within the

meaning of section 104(a)(2).2    We reject at the outset

petitioners’ reliance on Murphy v. IRS, supra.      After the filing

of petitioners’ posttrial brief, the Court of Appeals for the

D.C. Circuit vacated its judgment resulting from that opinion and

reheard arguments on the case.    Later, in Murphy v. IRS, 493 F.3d

170 (D.C. Cir. 2007), the Court of Appeals for the D.C. Circuit

held that the damages received by the taxpayer were income

included in the taxpayer’s gross income and were outside the

exclusion in section 104(a)(2).    We agree without further comment

that the $25,000 is income to petitioner and limit our subsequent

inquiry to whether the $25,000 is excluded from their gross

income under section 104(a)(2).

     Section 104(a)(2) is construed narrowly.      See, e.g.,

O’Gilvie v. United States, 519 U.S. 79 (1996); Commissioner v.

Schleier, 515 U.S. 323, 328 (1995).      Under section 104(a)(2),

settlement proceeds are excludable from gross income to the

extent:   (1) The underlying cause of action is based upon tort or


     2
       We apply sec. 104(a)(2) as amended in 1996 by the Small
Business Job Protection Act of 1996, Pub. L. 104-188, sec. 1605,
110 Stat. 1838, effective generally for amounts received after
Aug. 20, 1996. That amendment, in relevant part, added the
modifier “physical” after “personal” and before “injuries”.
                                - 6 -

tort-type rights, and (2) the proceeds were received on account

of “personal physical injuries” or “physical sickness”.    See

Commissioner v. Schleier, supra at 333-334 (analyzing section

104(a)(2) before its amendment in 1996); Robinson v.

Commissioner, 102 T.C. 116 (1994), affd. in part and revd. in

part on an issue not relevant herein 70 F.3d 34 (5th Cir. 1995);

Shaltz v. Commissioner, T.C. Memo. 2003-173.   We focus on the

second requirement and ask ourselves whether petitioner’s $25,000

settlement was received on account of “personal physical

injuries” or “physical sickness”.   In this context, the terms

“physical injury” and “physical sickness” do not include

emotional distress, except to the extent of damages not in excess

of the amount paid for medical care described in section

213(d)(1)(A) and (B) attributable to emotional distress.    See

sec. 104(a) (flush language).

     We determine the reason for the settlement payment by

ascertaining the intent of the payor in making the payment.      See

Robinson v. Commissioner, supra at 127.   We make that

determination by analyzing all relevant facts and circumstances.

See id.; see also Shaltz v. Commissioner, supra.   We conclude

from our analysis that petitioner never sought in the lawsuit a

recovery of damages for “personal physical injuries” or “physical

sickness” and, most importantly, that Alameda did not pay the

$25,000 to petitioner with any intent to settle a claim of hers
                                - 7 -

for “personal physical injuries” or “physical sickness”.    In the

latter regard, we find from the record that the settlement

agreement memorialized Alameda’s understanding that petitioner

had filed the lawsuit against Alameda seeking “wages, penalties,

other damages, and attorneys’ fees”, that Alameda would issue

petitioner a Form 1099 to reflect its payment to her of the

$25,000 as a payment of income, and that Alameda required

petitioner to give to it a completed Form W-9 as a condition

precedent to Alameda’s paying the $25,000 to petitioner.    We also

find with respect to the $25,000 payment that Alameda actually

issued to petitioner a 2003 Form 1099-MISC reporting that it had

paid her the $25,000 as nonemployee compensation.

     We hold that the $25,000 was not paid to petitioner for

personal physical injuries or physical sickness within the

meaning of section 104(a)(2).   While petitioners emphasize the

fact that petitioner claimed damages for emotional distress, and

we believe that part of the $25,000 may have been paid to satisfy

and extinguish that claim, our conclusion does not change.

Damages for emotional distress no longer qualify for exclusion

under section 104(a)(2), except to the extent that they do not

exceed the amount paid for medical care related to the emotional

distress.   Sec. 104(a)(2) and flush language; Kidd v.

Commissioner, T.C. Memo. 2004-135; see H. Conf. Rept. 104-737, at

301 n.56 (1996), 1996-3 C.B. 741, 1041 n.56 (emotional distress,
                               - 8 -

including symptoms such as insomnia, headaches, and stomach

disorders, is not considered a physical injury or physical

sickness, except that an exclusion may be allowed to the amount

paid for medical care attributable to the emotional distress).

See generally Black's Law Dictionary 542 (7th ed. 1999)

(“emotional distress” denotes “A highly unpleasant mental

reaction (such as anguish, grief, fright, humiliation, or fury)

that results from another person’s conduct; emotional pain and

suffering.”).   Petitioners have not asserted that they paid for

any medical care attributable to emotional distress, so as to

come within the just-referenced exception, and the record does

not establish that any such payments were in fact made.

     All arguments made by petitioners for a holding contrary to

that expressed herein have been considered, and we reject those

arguments not discussed herein as irrelevant or without merit.


                                            Decision will be entered

                                       for respondent.
