                  T.C. Summary Opinion 2009-27



                      UNITED STATES TAX COURT



                 RONALD COLQUITT, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 15771-07S.             Filed February 26, 2009.


     Ronald Colquitt, pro se.

     Dorit Shaybani-Rad, for respondent.



     GERBER, 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, all 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.
                                -2-

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

for any other case.

     On June 11, 2007, respondent issued a notice of deficiency

which determined that petitioner failed to report certain items

of income for the 2005 tax year.    Respondent determined a

deficiency of $4,320 and an accuracy-related penalty under

section 6662(a) of $1,107.   After concessions by both parties,

the only issue that remains is whether petitioner was required to

report as income $14,000 received from his former employer as a

result of his wrongful termination claim.

                             Background

     Petitioner resided in California when he filed his petition.

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

stipulation of facts and the attached exhibits are

incorporated herein by this reference.    Portions of the record

have been sealed at the request of petitioner.

     At the time of the controversy underlying this case,

petitioner was employed as a private investigator.    During the

course of his employment petitioner suffered from a physical

injury or sickness while on an assignment.    His employer asked

him to continue working despite the injury or sickness, and when

petitioner refused, he was fired.     Subsequently, petitioner filed

suit against the former employer and ultimately received $14,000

on his claim in 2005.
                                   -3-

      Petitioner timely filed a Form 1040, U.S. Individual Income

Tax Return, for the 2005 tax year.       Petitioner did not report the

$14,000 recovery as income.     Petitioner’s former employer did,

however, report the payment to respondent by filing a Form 1099-

MISC, Miscellaneous Income.

                               Discussion

      Gross income includes “all income from whatever source

derived” unless specifically excluded.      Sec. 61(a).   Section

61(a) is broadly interpreted, but exclusions from income are

narrowly defined.    Commissioner v. Schleier, 515 U.S. 323, 327-

328 (1995).

      Section 104(a)(2) excludes damages received on account of

personal physical injury or physical sickness.      To qualify under

section 104(a)(2), taxpayers must show:      (1) The underlying cause

of action was based upon tort or tort-type rights and (2) the

damages were received on account of personal physical injuries or

physical sickness.      Id. at 336-337; sec. 1.104-1(c), Income Tax

Regs.

I.   Tort-Based Claim

      The section 104(a)(2) requirement that petitioner’s claim

arise from a tort or tort-type rights obligates us to examine

State law, because State law determines the nature of the claim.

Venable v. Commissioner, T.C. Memo. 2003-240, affd. 110 Fed.

Appx. 421 (5th Cir. 2004).
                                   -4-

     Under California law an employer’s right to fire an at-will

employee is limited by public policy considerations.      Tameny v.

Atl. Richfield Co., 610 P.2d 1330, 1332-1333 (Cal. 1980).      At-

will employees may recover tort damages from employers if they

can show they were discharged in contravention of fundamental

public policy.     Id. at 1336.   To prevail, employees must show

that important public constitutional or statutory interests were

contravened.     Silo v. CHW Med. Found., 45 P.3d 1162, 1166 (Cal.

2002).

     The California Labor Code forbids employers from requiring

or allowing any employee to be in any place of employment that is

not safe and healthful.    Cal. Lab. Code sec. 6402 (West 2003).

Moreover, an employee cannot be discharged for refusing to

perform work which would result in a violation of the California

Labor Code and where the violation would create a real and

apparent hazard to that employee or to fellow employees.     Cal.

Lab. Code sec. 6311 (West 2003).

     Petitioner did have tort-based claims against his employer.

The record suggests at least two separate theories of recovery.

First, the employer’s insistence that petitioner continue working

in the conditions that caused his injury or sickness violated

Cal. Lab. Code sec. 6402 and could therefore support a claim of

negligence per se.     Second, the termination of petitioner’s

employment because he refused to continue working in those
                                -5-

conditions violated Cal. Lab. Code sec. 6311 and the underlying

public policy of ensuring safe workplace conditions.2    That would

support a claim for wrongful termination.

      We are unpersuaded by respondent’s argument that

petitioner’s wrongful termination claim could have been grounded

in contract.   Janda v. Madera Cmty. Hosp., 16 F. Supp. 2d 1181,

1188 (E.D. Cal. 1998).   In the Janda case, bylaws approved and

adopted by the hospital’s governing board were mutually binding

on the hospital and the plaintiff-physician, creating an implied-

in-fact contract between the parties.   Id.   As a result, the

nondiscrimination provision in the bylaws limited the hospital’s

ability to terminate the plaintiff’s employment.    The plaintiff

based his wrongful termination on that implied contractual

restriction.   Here, there is nothing in the record that indicates

the existence of any express or implied contractual limitations

on the employer’s ability to terminate petitioner’s employment.

II.   Physical Injury or Physical Sickness

      For payments made after August 20, 1996, Congress amended

section 104(a)(2) to limit the exclusion to amounts received only

for physical injuries.   Small Business Job Protection Act of

1996, Pub. L. 104-188, sec. 1605, 110 Stat. 1838.   Under prior



      2
      It is also noted that a few months after petitioner’s
recovery on his claim, California enacted a regulation
specifically addressing the injury or sickness petitioner
suffered. Cal. Code Regs. 8, sec. 3395 (2005).
                                 -6-

law the exclusion had also been granted for nonphysical injuries.

H. Conf. Rept. 104-737, at 301 (1996), 1996-3 C.B. 741, 1041.

     We must again look to the nature of petitioner’s underlying

claim to determine whether the payment received was for a

physical injury or sickness.    See Connolly v. Commissioner, T.C.

Memo. 2007-98.   The determining factor is the payor’s intent or

dominant reason for making the payment.     See Vincent v.

Commissioner, T.C. Memo. 2005-95.      This is generally determined

by reference to the stated reasons for the payment and the

accompanying factual setting.    Stocks v. Commissioner, 98 T.C. 1,

11 (1992); King- Knoll v. Commissioner, T.C. Memo. 2003-277.

However, a general release that is broad and inclusive gives no

indication as to the nature of the underlying claim.      Connolly v.

Commissioner, supra.   If the reason for the payment is not

thereby expressly given, the payor’s intent must be determined

from all the surrounding facts and circumstances.      Henderson v.

Commissioner, T.C. Memo. 2003-168, affd. 104 Fed. Appx. 47 (9th

Cir. 2004).

     In the sealed portion of the record, the reasons given for

the payment were general and unspecific.     Thus, they are not

dispositive as to the nature of petitioner’s claim.     However,

that portion of the record does specifically refer to

petitioner’s wrongful termination allegation and makes no mention

of any claim for negligence.    This suggests the settlement
                                  -7-

proceeds were intended as payment only for petitioner’s wrongful

termination claim.

     In turn, damages petitioner received for that wrongful

termination claim were not on account of physical injury or

sickness.   In order to meet the physical injury or sickness

requirement of section 104(a)(2), petitioner must show that his

former employer’s actions caused or exacerbated his injury or

sickness.   See Vincent v. Commissioner, supra.

     In the Vincent case, the taxpayer suffered from active

peptic ulcer disease and was fired by her employer while on

disability leave.    In her suit against her employer the taxpayer

claimed she was wrongfully terminated in violation of

California’s Fair Employment and Housing Act.     Because she did

not allege that her employer’s actions caused or exacerbated her

condition, we found that the jury did not consider this issue and

therefore could not have awarded any portion of the damages on

the basis of a claim for personal physical injuries.     We also

found that the jury awarded damages solely on the basis of the

employer’s discriminatory actions, which caused the taxpayer’s

lost wages and mental distress.    Accordingly, we held the

taxpayer was not entitled to exclusion under section 104(a)(2).

     Petitioner has likewise not shown the required causal

relationship.   That he was physically injured or sick rendered

his termination wrongful, but this is not enough for exclusion
                                 -8-

under section 104(a)(2).   He must demonstrate that he received

the payment on account of the physical injury or sickness.    He

has not done so.   The evidence in the record indicates that the

recovery was intended as “additional pay and benefits”.     The

employer’s filing of the Form 1099-MISC confirms this.     As in

Connolly v. Commissioner, supra, it indicates the employer

intended the payment to be for a nonphysical injury or sickness.

As the payment petitioner received would undoubtedly have been

taxed as income if he had not been wrongfully terminated,

permitting the exclusion would grant him a windfall.    The Supreme

Court noted this defect in the prior law:

     We concede that the original provision’s language does
     go beyond what one might expect a purely tax-policy-
     related “human capital” rationale to justify. That is
     because the language excludes from taxation not only
     those damages that aim to substitute for a victim’s
     physical or personal well-being--personal assets that
     the Government does not tax and would not have taxed
     had the victim not lost them. It also excludes from
     taxation those damages that substitute, say, for lost
     wages, which would have been taxed had the victim
     earned them. To that extent, the provision can make
     the compensated taxpayer better off from a tax
     perspective than had the personal injury not taken
     place.

O’Gilvie v. United States, 519 U.S. 79, 86 (1996).     The addition

of the “physical” injury requirement by the 1996 amendment was

clearly meant to prevent this.

     Even assuming that a portion of petitioner’s recovery was

attributable to a negligence claim and therefore compensation for

physical injury or sickness, he has not demonstrated how much of
                                 -9-

the recovery should be apportioned to that claim.        Because the

Court is not allowed to make that allocation, the entire amount

is not excludable under section 104(a)(2).     See Whitehead v.

Commissioner, T.C. Memo. 1980-508.

     For these reasons, we hold that the payment to petitioner

was not damages received on account of personal physical injury

or sickness and therefore is not excludable from income under

section 104(a)(2).

     To reflect the foregoing,


                                            Decision will be entered

                                       under Rule 155.
