                        T.C. Memo. 2009-209



                      UNITED STATES TAX COURT



                  MARY ANN SAVE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 22499-07.             Filed September 15, 2009.



     Mary Ann Save, pro se.

     Jeremy McPherson, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     HAINES, Judge:   Respondent determined a deficiency in

petitioner’s Federal income tax of $165,600 and a section 6662(a)

accuracy-related penalty of $33,120 for 2004.1   After

     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and all Rule references
                                                   (continued...)
                                - 2 -

concessions,2 the issue for decision is whether petitioner should

have included $500,000 she received as a result of a lawsuit

settlement as income on her 2004 Federal income tax return.

                        FINDINGS OF FACT

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

The stipulation of facts, supplemental stipulation of facts, and

attached exhibits are incorporated herein by this reference.    At

the time she filed her petition, petitioner resided in

California.

     In November 2003 petitioner and her colleague, Dr. Moneesha

Pinto (plaintiffs), filed a first amended complaint against the

County of Santa Clara, California (the county), in the U.S.

District Court for the Northern District of California.    In that

amended complaint plaintiffs alleged:   (1) Violation by the

county of their First Amendment rights under 42 U.S.C. section

1983; (2) “Whistleblower Retaliation” under Cal. Lab. Code sec.

1102.5; (3) “Whistleblower Retaliation” under Cal. Health &

Safety Code sec. 1278.5(b)(1); (4) intentional infliction of

emotional distress; (5) negligent infliction of emotional

distress; and (6) defamation.




     1
      (...continued)
are to the Tax Court Rules of Practice and Procedure.    Amounts
are rounded to the nearest dollar.
     2
      Respondent concedes the sec. 6662(a) penalty.
                                 - 3 -

     On November 22, 2004, plaintiffs and the County signed a

“Settlement Agreement and General Release” (settlement

agreement).     The settlement agreement stated that “Plaintiffs

* * * hereby release and forever discharge the County * * * from

any and all claims that Plaintiffs have or may have against [the

County].”     The parties define the term “any and all claims” to

mean “all claims of any kind, whether known or unknown,

anticipated or unanticipated, past or present, contingent or

fixed; and all claims that were asserted or could have been

asserted”.     Under the terms of the settlement agreement, the

county paid $500,000 to petitioner and $750,000 to petitioner’s

attorneys.3

     Petitioner did not report any portion of the $500,000

settlement as income on her 2004 return.     On July 2, 2007,

respondent mailed a notice of deficiency to petitioner for 2004

in which respondent determined that the $500,000 the county paid

to petitioner was includable in her gross income.     On October 1,

2007, petitioner filed a petition with this Court.

                                OPINION

     The definition of gross income under section 61(a) broadly

encompasses any accession to a taxpayer’s wealth.     The scope of

gross income is sweeping.     United States v. Burke, 504 U.S. 229,


     3
      Respondent concedes that the $750,000 the county paid to
petitioner’s attorneys did not constitute gross income to
petitioner.
                                - 4 -

233 (1992); Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429

(1955).   Exclusions from gross income are narrowly construed.

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

v. Burke, supra at 248 (Souter, J., concurring in judgment);

Taggi v. United States, 35 F.3d 93, 95 (2d Cir. 1994).

Therefore, settlement proceeds constitute gross income unless the

taxpayer proves they are specifically excepted by another

statutory provision.4

     Section 104(a)(2) provides for an exclusion from gross

income:

     SEC. 104. COMPENSATION FOR INJURIES OR SICKNESS.

          (a) In General.--Except in the case of amounts
     attributable to (and not in excess of) deductions
     allowed under section 213 (relating to medical, etc.,
     expenses) for any prior taxable year, gross income does
     not include--

                *    *    *     *       *   *   *

                (2) 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;

     Petitioner claims that the emotional distress she allegedly

suffered resulted in a physiological illness and further claims

on brief that her settlement proceeds were received on account of

her physiological illness.    Respondent contends that the


     4
      Petitioner does not argue that the burden of proof shifts
to respondent pursuant to sec. 7491(a), nor has she shown that
the threshold requirements of sec. 7491(a) have been met.
                               - 5 -

settlement agreement does not allocate petitioner’s proceeds to a

claim of personal physical injury or physical sickness and that

petitioner has not shown that the county intended to compensate

petitioner for personal physical injury or physical sickness.

I.   Rationale of Settlement

     Determining whether a settlement was entered into on account

of personal physical injuries or physical sickness requires an

examination of the settlement agreement language.     Pipitone v.

United States, 180 F.3d 859, 863 (7th Cir. 1999).    It is not

sufficient that a tort or tortlike injury exists.    See United

States v. Burke, supra at 234-235.     To be excludable, the damages

received must be in settlement of those injuries.    Sec. 1.104-

1(c), Income Tax Regs.; see also Commissioner v. Schleier, supra

at 337.5

     It is petitioner’s duty to prove the proper allocation

between taxable and nontaxable amounts.     Pipitone v. United

States, supra at 865.   “‘[F]ailure to show the specific amount of


     5
      Sec. 104(a)(2) was 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. In relevant part, the amendment added the modifier
“physical” after “personal” and before “injuries” and the
modifier “physical” was added before sickness. Although
Commissioner v. Schleier, 515 U.S. 323 (1995), United States v.
Burke, 504 U.S. 229 (1992), and Pipitone v. United States, 180
F.3d 859 (7th Cir. 1999), construe sec. 104(a)(2) before the 1996
amendment, their holding that proceeds are excludable under sec.
104(a)(2) only if shown to be received in settlement of injuries
addressed by the statute remains good law.
                                 - 6 -

the payment allocable to the claims of tort or tortlike damages

for personal injuries results in the entire amount’s being

presumed not to be excludible.’” Id. at 864 (quoting Wise

v. Commissioner, T.C. Memo. 1998-4); Taylor v. Commissioner, T.C.

Memo. 1999-323, affd. without published opinion 246 F.3d 676 (9th

Cir. 2000); Morabito v. Commissioner, T.C. Memo. 1997-315.

     A.   Express Language of Settlement

     Language in a settlement agreement can offer probative

evidence on how a settlement payment should be treated for

purposes of section 104(a)(2).    See, e.g., Bent v. Commissioner,

87 T.C. 236, 246 (1986), affd. 835 F.2d 67 (3d Cir. 1987).

     The settlement agreement defined a very general reference to

petitioner’s claims against the county and failed to allocate

between tort or tortlike claims excludable under section 104(a)

and other claims not excludable.    Thus, while petitioner can show

that her underlying infliction of emotional distress claims are,

in part,6 “actions for personal physical injury”, the record does

not indicate that the settlement agreement awarded any

compensation for those claims.




     6
      Petitioner’s emotional distress is not treated as a
physical injury under sec. 104(a)(2), except to the extent that
settlement proceeds attributable to it were used to pay for
medical care.
                                - 7 -

       B.   Intent of Payors

       In the absence of any express language in the agreement, the

intent of the payor is the most important factor in determining

the purpose of the payment.    Pipitone v. United States, supra

at 864; Kurowski v. Commissioner, 917 F.2d 1033, 1036 (7th Cir.

1990), affg. T.C. Memo. 1989-149; Knuckles v. Commissioner, 349

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

Commissioner, 290 F.2d 283, 284 (2d Cir. 1961), affg. T.C. Memo.

1960-21; Metzger v. Commissioner, 88 T.C. 834, 847-848 (1987),

affd. without published opinion 845 F.2d 1013 (3d Cir. 1988);

Kroposki v. Commissioner, T.C. Memo. 1997-563.

       Petitioner failed to show that the county intended any part

of her settlement proceeds to be allocated to her medical

expenses that she alleges were attributable to emotional

distress.    The flush language of section 104(a) provides that,

for purposes of paragraph (2), emotional distress shall not be

treated as a physical injury or physical sickness, except to the

extent that damages attributable to emotional distress were used

to pay for medical care as described in section 213(d)(1)(A) and

(B).

       The record does not indicate that the county agreed to

provide petitioner with settlement proceeds for any reason other

than to effect a general release of her claims.    This Court

cannot apportion damages among various tort and nontort claims
                                 - 8 -

where the settlement was a general release and there is no

evidence on which to predicate an allocation.       Strong v.

Commissioner, T.C. Memo. 1994-346, affd. on this issue and revd.

on other grounds without published opinion 79 F.3d 1154 (9th Cir.

1996).

II. Conclusion

     Petitioner has not demonstrated that the $500,000 payment

she received from the county was “on account of personal physical

injuries or physical sickness”.    Moreover, the Court will not

speculate as to what amount, if any, of the settlement was paid

to settle tortlike personal physical injury claims.        Absent proof

of a specific payment for tortlike personal physical injuries or

physical sickness, petitioner does not meet the criteria for

exclusion of any part of the settlement from income under section

104(a)(2).   Thus, in accordance with section 61, the $500,000

payment must be included in petitioner’s gross income for the

2004 taxable year.

     In reaching our holdings, we have considered all arguments

made, and, to the extent not mentioned, we conclude that they are

moot, irrelevant, or without merit.

     To reflect the foregoing,


                                              Decision will be entered

                                         under Rule 155.
