                        T.C. Memo. 2010-5



                     UNITED STATES TAX COURT



                 MARION J. WELLS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4407-09.                Filed January 5, 2010.



     Marion J. Wells, pro se.

     Miles B. Fuller, for respondent.



                       MEMORANDUM OPINION


     PANUTHOS, Chief Special Trial Judge:    This matter is before

the Court on respondent’s motion for partial summary judgment

filed pursuant to Rule 121.1    The sole issue for decision is



     1
      Unless otherwise indicated, all Rule references are to the
Tax Court Rules of Practice and Procedure. All amounts are
rounded to the nearest dollar.
                               - 2 -

whether a 2005 settlement payment to petitioner is excluded from

income under section 104(a)(2)2 as damages received on account of

personal physical injuries or physical sickness.

                            Background

     At the time the petition was filed, petitioner resided in

Colorado.

     Petitioner began her employment with the Colorado Department

of Transportation (CDOT) in 1975.   In 1995, after assignment to a

new project at CDOT, petitioner had an altercation with her

supervisor.   In November 1995 petitioner filed a discrimination

and retaliation complaint with the CDOT Center for Equal

Employment Opportunity.   It was after this complaint that

petitioner began taking leave and seeing a therapist to deal with

the stress caused by the altercation.    From the date of the

complaint until her termination 10½ months later, petitioner was

on leave approximately 8 of the 10½ months.    CDOT terminated

petitioner’s employment when her leave was exhausted in September

1996.

     In January 1997 petitioner filed suit in District Court

against CDOT, her supervisor, and her supervisor’s superior

alleging gender discrimination and retaliation under 42 U.S.C.

sections 1983 and 1988 and title VII of the Civil Rights Act of



     2
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year at issue.
                                 - 3 -

1964, as amended, Pub. L. 88-352, tit. VII, 78 Stat. 253,

codified at 42 U.S.C. secs. 2000e-2-2000e-17 (2006).

Petitioner’s   complaint alleged, inter alia, employment

discrimination based on gender and that the stress caused by the

altercation and the subsequent perceived inaction by CDOT in

response to the complaint she lodged caused her to take leave.

Petitioner asserted that when her leave was exhausted, her

employment was terminated and she “was given no opportunity to

return to her position.”

     The District Court granted CDOT’s motion for summary

judgment, and petitioner appealed to the U.S. Court of Appeals

for the Tenth Circuit.     In April 2003 the Court of Appeals

reversed on the retaliation claim and remanded the case for

trial.3

     In November 2004 the parties filed a joint motion to dismiss

with prejudice and in February 2005 entered into a settlement

agreement.   The settlement agreement states that $175,000 was to

be paid to petitioner “as damages for her emotional distress due

to depression and other claims, not as wages or back pay,” and


     3
      Petitioner claims CDOT employees retaliated against her
because of her previous lawsuit against CDOT. In 1980 petitioner
filed a class action lawsuit against CDOT for employment
discrimination based on gender under tit. VII of the Civil Rights
Act of 1964. In 1986 the parties entered a court-approved
settlement agreement. The case was closed in May 1995. Wells v.
Colo. Dept. of Transp., 325 F.3d 1205, 1210 (10th Cir. 2003).
The Court takes judicial notice of the opinion of the Court of
Appeals. Fed. R. Evid. 201.
                               - 4 -

that it “shall constitute a full and final settlement of all

claims [petitioner] asserted or might assert” against the

defendants in the 1997 lawsuit.   The settlement agreement also

states that a Form 1099-MISC, Miscellaneous Income, would be

issued to petitioner and reported to the Internal Revenue Service

(IRS).   Petitioner did not report the $175,000 as income on her

2005 income tax return.   Respondent treated the payment as

includable in gross income for 2005 and on that basis determined

a deficiency of $48,003 in her 2005 income tax and an accuracy-

related penalty of $9,601.   It is the characterization of the

$175,000 payment to petitioner that is before the Court.

                             Discussion

     A motion for summary judgment or partial summary judgment

may be granted if the pleadings and other materials demonstrate

that no genuine issue of material fact exists and a decision can

be rendered as a matter of law.   Rule 121(b); Celotex Corp. v.

Catrett, 477 U.S. 317, 323 (1986); Fla. Peach Corp. v.

Commissioner, 90 T.C. 678, 681 (1988).    The moving party bears

the burden of showing that no genuine issue of material fact

exists, and the Court will view any factual material and

inferences in the light most favorable to the nonmoving party.

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986); Naftel
                                 - 5 -

v. Commissioner, 85 T.C. 527, 529 (1985).     If there exists any

reasonable doubt as to the facts at issue, the motion must be

denied.    Espinoza v. Commissioner, 78 T.C. 412, 416 (1982).

     The Court is satisfied that no genuine issue of material

fact exists.    Partial summary judgment is appropriate in this

case.

     Generally, gross income includes all income from whatever

source derived.    See sec. 61(a); sec. 1.61-1(a), Income Tax

Regs.     While section 61(a) broadly applies to any accession to

wealth, statutory exclusions from gross income are to be narrowly

construed.     See Commissioner v. Schleier, 515 U.S. 323, 328

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

Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955).

Petitioner must bring herself within the clear scope of any

statutory exclusion.    See Commissioner v. Schleier, supra at

336-337; United States v. Burke, supra at 233.     Section 61(b)

indicates that items specifically excluded from gross income are

listed in part III, secs. 101-140, and petitioner claims that she

falls within section 104.

     Damages (other than punitive damages) received on account of

personal physical injuries or physical sickness may generally be

excluded from gross income.    Sec. 104(a)(2).   For the damages to

be excludable under this provision, however, the underlying cause
                              - 6 -

of action must (1) be based in tort or tort-type rights,4 and (2)

the proceeds must be damages received on account of personal

physical injury or physical sickness.   See Commissioner v.

Schleier, supra at 328, 337.5 Under the statute as amended in

1996,6 damages for emotional distress resulting from nonphysical

injury are not excludable from gross income (except for an amount



     4
      The IRS has recently changed its position on the
requirement of a tort or tort-type right. See sec. 1.104-1(c),
Proposed Income Tax Regs., 74 Fed. Reg. 47153 (Sept. 15, 2009).
This is not an issue we need to consider since we decide this
case on the second prong of the test.
     5
      The version of the statute construed in Commissioner v.
Schleier, 515 U.S. 323 (1995), did not specify that the personal
injuries or sickness be “physical”; however, the amendment
described infra note 6, effective generally for amounts received
after Aug. 20, 1996, added that requirement.
     6
      Before it was amended by the Small Business Job
Protection Act of 1996 (SBJPA), Pub. L. 104-188, sec. 1605(a),
110 Stat. 1838, sec. 104(a)(2) excluded from gross income
amounts received on account of personal injuries or sickness.
The reference to personal injuries or sickness included
“nonphysical injuries to the individual, such as those affecting
emotions, reputation, or character”. United States v. Burke, 504
U.S. 229, 235 n.6 (1992); see Robinson v. Commissioner, 102 T.C.
116, 125-126 (1994), affd. in part, revd. in part and remanded on
another issue 70 F.3d 34 (5th Cir. 1995).
     The SBJPA amended sec. 104(a)(2) to exclude from gross
income “the amount of any damages (other than punitive damages)
received (whether by suit or agreement and whether as lump sums
or as periodic payments) on account of personal physical injuries
or physical sickness”. SBJPA sec. 1605(a). The SBJPA also
amended sec. 104(a) by adding the following flush language: “For
purposes of paragraph (2), emotional distress shall not be
treated as a physical injury or physical sickness. The preceding
sentence shall not apply to an amount of damages not in excess of
the amount paid for medical care * * * attributable to emotional
distress.” Id. sec. 1605(b), 110 Stat. 1838.
                                 - 7 -

of damages not in excess of the amount paid for medical care to

treat the emotional distress).    H. Conf. Rept. 104-737, at 301

(1996), 1996-3 C.B. 741, 1041.

     When damages are received pursuant to a settlement

agreement, the nature of the claim that was the basis for

settlement, and not the validity of the claim, controls whether

such amount is excludable under section 104(a)(2).      United States

v. Burke, supra at 237; see also Bagley v. Commissioner, 105 T.C.

396, 406 (1995) (“the critical question is, in lieu of what was

the settlement amount paid?”), affd. 121 F.3d 393 (8th Cir.

1997).   If the settlement agreement lacks express language

stating what the settlement amount was paid to settle, we look to

the intent of the payor, based on all the facts and circumstances

of the case, including the complaint that was filed and the

details surrounding the litigation.      Knuckles v. Commissioner,

349 F.2d 610, 613 (10th Cir. 1965), affg. T.C. Memo. 1964-33;

Robinson v. Commissioner, 102 T.C. 116, 127 (1994), affd. in

part, revd. in part and remanded on another issue 70 F.3d 34 (5th

Cir. 1995).

     We turn first to the second prong of the test and ask

whether the damages were received on account of personal physical

injury or physical sickness.   Respondent alleges that the damages

petitioner received were not on account of personal physical

injury or physical sickness.   The settlement agreement states
                               - 8 -

that the money was paid “as damages for her emotional distress

due to depression and other claims, not as wages or back pay.”

The agreement settled petitioner’s employment discrimination and

retaliation claims in the 1997 suit.

     Money paid for emotional distress not attributable to

physical injury or physical sickness is includable in income, and

any amounts paid in such circumstances for physical symptoms of

emotional distress are similarly includable in income.    See H.

Conf. Rept. 104-737, supra at 301, 1996-3 C.B. at 1041.       The

Court is satisfied that the payment was made as damages for

emotional distress due to depression and, as a matter of law,

such damages, not being attributable to physical injury or

sickness, but to a nonphysical injury (namely, her claims of

suffering gender-based discrimination and unlawful retaliation

with respect to her employment) are not excludable from her gross

income under section 104(a)(2), as amended in 1996, except to the

extent of any amounts she expended for medical care to treat her

emotional distress.

     Petitioner claims that since depression is not specifically

excluded as a physical injury under section 104, it is within the

definition of a physical injury.    This is not the correct

standard.   Petitioner must show that she falls within the clear

scope of any statutory exclusion.    See Commissioner v. Schleier,

supra at 336-337; United States v. Burke, supra at 233.
                               - 9 -

Petitioner has not shown that she falls within the exclusion

under section 104, the regulations, the legislative history, or

caselaw.   See Murphy v. IRS, 493 F.3d 170 (D.C. Cir. 2007);

Moulton v. Commissioner, T.C. Memo. 2009-38; Sanford v.

Commissioner, T.C. Memo. 2008-158; Bond v. Commissioner, T.C.

Memo. 2005-251.

     Petitioner does not argue that the characterization of the

payment does not accurately reflect the nature of the claim or

the settlement payment; rather, she argues that she was advised

that the characterization results in the payment not being

includable in income.   To the extent petitioner argues that she

did not know that the amount paid in settlement would be

includable in income, we note that a taxpayer is presumed to know

the law and a mistake of law does not excuse liability.    See Tide

Water Oil Co. v. Commissioner, 29 B.T.A. 1208, 1232 (1934); see

also Bussell v. Commissioner, T.C. Memo. 2005-77, affd. 262 Fed.

Appx. 770 (9th Cir. 2007).7

     We hold that the payment is not excludable under section

104(a)(2) from petitioner’s gross income for her taxable year

2005, except to the extent of any amount she paid for medical

care to treat her emotional distress.   Thus, the only remaining



     7
      Petitioner’s knowledge and any advice she received might
otherwise be relevant as to the penalty respondent imposed.
Respondent, however, has conceded the penalty in his motion for
partial summary judgment.
                             - 10 -

issue is the amount which petitioner expended on medical care for

her emotional distress.

     We have considered all of petitioner’s contentions and

arguments that are not discussed herein, and we find them to be

without merit, irrelevant, and/or moot.

     To reflect the foregoing,



                                      An appropriate order granting

                                 respondent’s motion for partial

                                 summary judgment will be issued.
