                        T.C. Memo. 1997-336



                      UNITED STATES TAX COURT



    JULIUS R. PHILLIPS AND MARCIA G. PHILLIPS, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7996-96.                        Filed July 24, 1997.




     Michael Hinchion, for petitioners.

     Edsel Ford Holman, Jr., for respondent.



                        MEMORANDUM OPINION


     PARR, Judge:   This case is before us on the parties' cross-

motions for summary judgment under Rule 121.1    Respondent

1
     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, unless
otherwise indicated. All dollar amounts are rounded to the
                                                   (continued...)
                               - 2 -


determined a deficiency in petitioners' Federal income tax in the

amount of $30,920 for the taxable year 1992.    The term

"petitioner" refers to Julius R. Phillips.

     The issue for decision is whether petitioner may exclude

from gross income under section 104(a)(2) amounts received from

his employer upon termination of his employment on the ground

that such amounts represented damages received on account of

personal injury.   At the time the petition in this case was

filed, petitioners resided in Nashville, Tennessee.

     A motion for summary judgment is appropriate "if the

pleadings, answers to interrogatories, depositions, admissions,

and any other acceptable materials, together with the affidavits,

if any, show that there is no genuine issue as to any material

fact and that a decision may be rendered as a matter of law."

Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520

(1992), affd. 17 F.3d 965 (7th Cir. 1994).    The moving party

bears the burden of proving that there is no genuine issue of

material fact, and factual inferences are viewed in the light

most favorable to the nonmoving party.   United States v. Diebold,

Inc., 369 U.S. 654, 655 (1962); Preece v. Commissioner, 95 T.C.

594, 597 (1990).   The opposing party cannot rest upon mere

allegations or denials but must set forth specific facts showing


1
 (...continued)
nearest dollar, unless otherwise indicated.
                               - 3 -


there is a genuine issue for trial.    Rule 121(d).   The existence

of any reasonable doubt as to the facts will result in denial of

the motion for summary judgment.   Hoeme v. Commissioner, 63 T.C.

18, 20 (1974).

     The facts presented below are based on the pleadings, facts

stipulated by the parties, and other pertinent materials in the

record.   These facts are stated solely for purposes of deciding

the cross-motions.   The stipulation of facts and the exhibits

attached thereto are incorporated herein by this reference.

Background

     Petitioner was employed by International Business Machines

Corp. (IBM) for 28 years from September of 1964 through July of

1992.   During that period, petitioner was assigned by IBM to

various locations around the world and was regularly promoted.

At the time petitioner ceased his employment with IBM, he was 50

years old.

     In October of 1971, petitioner suffered a massive heart

attack and did not return to work until March of 1972.    In

January of 1981, petitioner suffered a heart/ventricular aneurysm

while on a business trip and was subsequently hospitalized for

heart surgery.   He returned to work in May of 1981.   In September

of 1989, petitioner suffered another heart attack while away on

business but returned to work 10 days later.    After the last of
                               - 4 -


these heart attacks, petitioner was no longer assigned by IBM to

foreign locations, nor was he promoted.

     Prior to July 31, 1992, IBM declined petitioner's request to

participate in an executive training program (training program)

that petitioner believed would have insured his continued

employment with IBM at the same or a higher job level.

Petitioner believed that IBM's decision was at least partially

motivated by his age and health status.

     On May 20, 1992, petitioner met with his executive

supervisor, Bjorn Andersen (Andersen), regarding his employment

situation, at which time he renewed his request to participate in

the training program.   Andersen agreed to support a renewed

request on petitioner's behalf but indicated that it would likely

again be denied.   During the meeting, Andersen informed

petitioner that his position at IBM likely would be eliminated

or, at a minimum, substantially downgraded, and therefore urged

that petitioner should "strongly consider" participating in IBM's

Modified and Extended Individual Transition Option Program (ITO

II Program), an early retirement or severance program, which

allows IBM employees to resign or retire early, receiving lump-

sum payments and other benefits.   Andersen stressed the

importance of participating in the ITO II Program to ensure

petitioner's continued eligibility for health and other benefits,

which might not be available to petitioner in the event his
                               - 5 -


employment was terminated after the expiration of the ITO II

program.   Petitioner perceived Andersen's recommendation as a

form of ultimatum.   Out of concern that he would be terminated

without further benefits, petitioner agreed to participate in the

ITO II program.

     As a condition of receiving the lump-sum payment and

benefits pursuant to the ITO II program, petitioner was required

to sign a General Release and Covenant Not to Sue (the release).

Petitioner signed the release on July 31, 1992.   The release is

broadly written and covers any and all possible and potential

claims in contract or in tort arising from employment or

termination of employment, including any claims against IBM

arising under the Americans with Disabilities Act.    Americans

with Disabilities Act of 1990 (ADA), Pub. L. 101-336, sec. 2, 104

Stat. 328 (current version at 42 U.S.C. sec. 12101 (1994)); Civil

Rights Act of 1991, Pub. L. 102-166, sec. 102, 105 Stat. 1072

(current version at 42 U.S.C. sec. 1981a (1994)).    Pertinent

sections of the release read as follows:

          In exchange for the sums and benefits which you
     will receive pursuant to the terms of the * * * [ITO-II
     Program], J. Ray Phillips[2] (hereinafter "you") agrees
     to release * * * [IBM] from all claims, demands,
     actions or liabilities you may have against IBM of
     whatever kind, including but not limited to those which
     are related to your employment with IBM or the
     termination of that employment. * * * You also agree

2
     The name J. Ray Phillips was typewritten in a blank space
provided in the release.
                                - 6 -


     that this release covers, but is not limited to, claims
     arising from the Age Discrimination in Employment Act
     of 1967, as amended, Title VII of the Civil Rights Act
     of 1964, as amended, and any other federal or state law
     dealing with discrimination in employment on the basis
     of sex, race, national origin, religion, disability, or
     age. You also agree that this release includes claims
     based on theories of contract or tort, whether based on
     common law or otherwise. This release does not include
     your vested rights, if any, in the IBM Retirement Plan,
     which survive unaffected by this release.

     *        *        *         *         *     *       *


     6.   In the event of rehire by IBM or any of its
          subsidiaries as a regular employee, you understand that
          IBM reserves the right to require repayment of a
          prorated portion of the ITO-II Program payment. The
          amount of repayment will be based on the number of
          weeks off the IBM payroll compared with the number of
          weeks' salary used to calculate your payment.

     At the time of signing the release petitioner had no legal

claims pending against IBM for unlawful employment practices.3

Petitioner, however, thought that he had a claim against IBM

pursuant to the ADA for compensatory and punitive damages, as

well as damages for emotional distress, as a result of its

alleged discriminatory treatment of him.

     In exchange for signing the release and participating in the

ITO II Program, petitioner received a $94,174 lump-sum payment

(the payment or ITO payment).   The payment amount for each



3
     Although petitioner did not file any legal claims against
IBM prior to signing the release, he did make verbal complaints
to Andersen, his supervisor, at a meeting which took place on May
20, 1992.
                               - 7 -


participant in the ITO II Program was calculated using the same

mathematical formula based on years of service.

     For the year 1992 petitioner received a Form W-2 from IBM

showing wages, tips, and other compensation of $218,329.

Petitioners attached a disclosure statement to their 1992 return,

asserting that the $94,174 ITO payment is excludable from gross

income pursuant to section 104(a)(2) as a payment received in

exchange for the release and settlement of tortlike rights.

Respondent determined that the ITO payment was fully taxable

severance pay.

Discussion

     Except as otherwise provided, gross income includes income

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

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

construed, statutory exclusions from income are narrowly

construed.   Commissioner v. Schleier, 515 U.S. 323, 328 (1995);

Kovacs v. Commissioner, 100 T.C. 124, 128 (1993), affd. without

published opinion 25 F.3d 1048 (6th Cir. 1994).

     Under section 104(a)(2), gross income does not include "the

amount of 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., provides:

          (c) Damages received on account of personal
     injuries or sickness. * * * The term "damages
                               - 8 -


     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.

     Thus, an amount may be excluded from gross income only when

it was received both:   (1) Through prosecution or settlement of

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

of personal 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).

     Where 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, 504 U.S. 229, 237

(1992); Thompson v. Commissioner, 866 F.2d 709, 711 (4th Cir.

1989), affg. 89 T.C. 632 (1987); Robinson v. Commissioner, 102

T.C. 116, 126 (1994), affd. in part and revd. in part 70 F.3d 34

(5th Cir. 1995).   "[T]he critical question is, in lieu of what

was the settlement amount paid?"    Bagley v. Commissioner, supra

at 406.

     Determination of the nature of the claim is factual.      Id.;

Stocks v. Commissioner, 98 T.C. 1, 11 (1992).     The first

requirement is the existence of a claim based upon tort or tort

type rights.   Commissioner v. Schleier, supra at 335.    The claim

must be bona fide, but not necessarily valid; i.e., sustainable.
                                - 9 -


Robinson v. Commissioner, supra at 126; Stocks v. Commissioner,

supra at 10; Sodoma v. Commissioner, T.C. Memo. 1996-275 (citing

Taggi v. United States, 35 F.3d 93, 96 (2d Cir. 1994)).     In this

connection, we have held that claims for potential future

personal injuries do not qualify for exclusion under section

104(a).   Roosevelt v. Commissioner, 43 T.C. 77 (1964); Starrels

v. Commissioner, 35 T.C. 646 (1961), affd. 304 F.2d 574 (9th Cir.

1962).    Such holdings imply that there must be an existing claim.

Moreover, while the claim need not have been previously asserted,

the absence of any knowledge of the claim on the part of the

employer-payor obviously has a negative impact in determining the

requisite intent of the payment.    Sodoma v. Commissioner, T.C.

Memo. 1996-275; see also Keel v. Commissioner, T.C. Memo. 1997-

278; Foster v. Commissioner, T.C. Memo. 1996-26.

     Petitioner asserts that he had a bona fide claim against IBM

pursuant to the ADA for infliction of emotional distress, and

therefore IBM accepted his ITO II Program participation request

and subsequent release in lieu of litigation.    In so arguing,

petitioner places heavy reliance on the Supreme Court's decision

in Commissioner v. Schleier, supra.     In Schleier, the Supreme

Court noted that "one of the hallmarks of traditional tort

liability is the availability of a broad range of damages to

compensate the plaintiff fairly for injuries caused by the

violation of his legal rights."    Id. at 335 (citing United States
                                - 10 -


v. Burke, supra at 235.     Petitioner asserts that the ADA provides

for a broad range of tortlike remedies, as contemplated by

Schleier.    An aggrieved employee bringing a claim under the ADA

is entitled to seek compensatory and punitive damages, as well as

damages for emotional pain, suffering, inconvenience, mental

anguish, loss of enjoyment of life, and other nonpecuniary

losses.     42 U.S.C. sec. 1981a(b).   Moreover, petitioner asserts

that IBM was aware of such claims, because he complained to his

supervisor of the grievances he had against IBM for such

employment discrimination.4

     Respondent contends that before petitioner executed the

release, he presented his complaints only orally and only to his

supervisor.     Respondent argues that petitioner's failure to send

IBM a written letter, to seek legal advice, or to lodge any

formal tortlike claim against IBM prior to and at the time of

signing the release establishes that there was no bona fide

4
   At a meeting with his supervisor, petitioner protested that it
would be unfair for IBM to force him out of the company given his
long record of outstanding service. Petitioner said that he was
being targeted for separation from the company due to his age and
serious health condition, which was known to IBM. Petitioner
stated that he felt pressured into signing the release to the
extent that he was made to fear losing his health benefits and to
the extent that it was implied that he had no future at IBM. Due
to his long history of heart-related problems, the prospect of
losing health coverage was extremely threatening to petitioner,
as he was then uninsurable. Thus, it was petitioner's contention
that IBM had illegally discriminated against him and that he
sustained personal injuries from being denied access to the
executive training program and from his early termination, in the
form of physical, mental, and emotional pain and suffering.
                              - 11 -


dispute between petitioner and IBM that could provide the basis

for settlement.

      We agree with petitioner that an employee is not required

to file a formal legal action against an employer prior to

settling an existing claim in order to exclude such a settlement

payment from income under section 104(a)(2).   Sodoma v.

Commissioner, supra.   Viewing the facts in the light most

favorable to petitioner, it can be argued that petitioner's act

of informing his supervisor of his complaints against IBM is at

least some evidence of an existing dispute between the parties

that could have provided the basis for settlement.   Moreover, we

tend to agree with petitioner that the ADA provides for a broad

range of tortlike remedies as discussed by the Supreme Court in

both Burke and Schleier.   Thus, we find, for purposes of this

motion only, that petitioner has met the first prong of

excludability under section 104(a)(2) in that he has established

the existence of an underlying tort-type cause of action.    See

Commissioner v. Schleier, 515 U.S. 323 (1995); see also Taggi v.

United States, supra at 96 (a claim must be bona fide, but does

not necessarily have to be sustainable or valid).

     We now turn to the language of the release itself.    The

release in this case is the same as that in Webb v. Commissioner,

T.C. Memo. 1996-50, and essentially the same as that in Sodoma v.

Commissioner, supra.   By its terms, petitioner released IBM from
                                - 12 -


liability for both contract and tort claims.      The release,

however, does not specifically indicate that the lump-sum payment

received by petitioner was paid to settle a potential personal

injury claim against IBM pursuant to the ADA.      We note that where

the settlement agreement lacks express language stating what the

settlement amount was paid to settle, then the most important

factor is the intent of the payor.       Knuckles v. Commissioner, 349

F.2d 610, 612 (10th Cir. 1965), affg. T.C. Memo. 1964-33; Stocks

v. Commissioner, supra at 10.    Here, respondent argues, and we

agree, that IBM did not make the payment on account of a personal

injury.    The release form appears to be a standard document used

by IBM for all of its employees who participate in the ITO II

Program.   Moreover, IBM calculated the amount of the $94,174

lump-sum payment received by petitioner using the same

mathematical formula for each participant in the ITO II Program

based on the participant's individual years of service.      Finally,

the release states that if petitioner were rehired by IBM, he

could be required to repay some portion of the lump-sum payment

based on the number of weeks off the IBM payroll compared with

the number of weeks' salary used to calculate the lump-sum

payment.   As in Sodoma v. Commissioner, T.C. Memo. 1996-275, and

Webb v. Commissioner, supra, the lump-sum payment herein appears

to have been severance pay rather than a payment for personal
                              - 13 -


injury.   Severance pay, just like the pay it replaces, is taxable

income.

     Finally, we note that petitioner has not alleged or come

forward with any evidence of the specific amounts of the payments

allocable to claims of tort or tort-type damages for personal

injuries.   The release makes no allocation, and petitioner has

not set forth any facts upon which he would rely to prove an

allocation.   Indeed, the fact that the $94,174 was based on

petitioner's years of service points in the direction of its

having been severance pay rather than a payment for personal

injury.   See Webb v. Commissioner, supra, which involved the same

payor and substantially the same plan as involved herein.

     In sum, we conclude that there is no material issue of fact

which requires a trial.   Accordingly, we hold that respondent's

motion for summary judgment will be granted and petitioners'

motion for summary judgment will be denied.

     To reflect the foregoing,



                                 An appropriate order and decision

                          will be entered granting respondent's

                          motion for summary judgment and denying

                          petitioners' motion for summary

                          judgment.
