                        T.C. Memo. 1997-343



                      UNITED STATES TAX COURT




              NEIL D. AND VY LUBART, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 20094-96.                       Filed July 28, 1997.




     Leonard L. Leighton, for petitioners.

     Elizabeth A. Owen, for respondent.



                        MEMORANDUM OPINION


     PARR, Judge:   This case is before us on respondent's motion

for summary judgment under Rule 121.1   Respondent determined a

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
                                                   (continued...)
                               - 2 -


deficiency in petitioners' Federal income tax of $22,553 for the

taxable year 1992, and an addition to tax under section

6651(a)(1) of $100 for failure to timely file.   The term

"petitioner" refers to Neil D. Lubart.

     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 Austin, Texas.

     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

1
 (...continued)
otherwise indicated. All dollar amounts are rounded to the
nearest dollar, unless otherwise indicated.
                              - 3 -


allegations or denials, but must set forth specific facts showing

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 stated solely for purposes of

deciding respondent's motion for summary judgment.

Background

     Petitioner was employed by International Business Machines

Corp. (IBM) as a physicist for more than 31 years.    While at IBM,

petitioner developed a dozen patents, and was responsible for

developing, along with other engineers, the world's first

commercial laptop computer for IBM.   At the time petitioner

ceased his employment with IBM, he was over 40 years old.

     At some point prior to July 31, 1992, petitioner became

eligible to participate in the IBM Modified and Extended

Individual Transition Option Program (ITO II Program).    The ITO

II Program allows IBM employees to resign or retire early,

receiving lump-sum payments and other benefits.    Petitioner was

required to sign a General Release and Covenant Not to Sue (the

release) as a condition for the sums and benefits, including the

lump-sum payment pursuant to the ITO II program.     The release is

broadly written and covers any and all possible and potential

claims in contract or in tort arising from employment or
                                - 4 -


termination of employment.    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], N. D. Lubart (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 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.

     On July 31, 1992, petitioner signed the release.    At the

time of signing the release petitioner had no legal claims for

unlawful employment practices pending against IBM, nor had he

lodged any informal complaints against the company.    Petitioner,

however, thought that he was forced by IBM to leave the company

and therefore had a claim against IBM for age discrimination and

emotional distress.
                                - 5 -


     In exchange for signing the release and participating in the

ITO II Program, petitioner received a $74,985 lump-sum payment

(the payment or ITO payment).   The payment was based on years of

service and rate of pay.

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

showing wages, tips, and other compensation as $128,8142.   On May

22, 1995, petitioners filed a 1992 joint Federal income tax

return.   Petitioners reported the $129,814 as wages, subtracted

the $74,985 ITO payment therefrom, and attached a disclosure

statement to their return, asserting that the 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).

2
   Petitioners received $128,814 from IBM. Petitioners also
received $1,000 from another employer. Thus, petitioners
reported total wages of $129,814 on their 1992 return.
                               - 6 -


     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
     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 tortlike 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
                               - 7 -


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

tortlike rights.   Commissioner v. Schleier, supra at 331.    The

claim must be bona fide, but not necessarily valid; i.e.,

sustainable.    Sodoma v. Commissioner, T.C. Memo. 1996-275

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

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

supra at 10.   In this connection, we note that 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).    Those holdings imply that

there must be an existing claim.

     Petitioner asserts that IBM was engaging in systematic

discrimination against employees over the age of 40, that he was

forced to leave the company because of his age, that as a result

he suffered from a severe state of depression for which he was

medically treated, and that age discrimination was the primary

concern of IBM in requiring petitioner to sign the release.

Therefore, petitioner contends that IBM accepted his ITO II
                              - 8 -


Program participation request and subsequent release in lieu of

litigation.

     Respondent argues, pursuant to Commissioner v. Schleier,

supra, that even if petitioner could establish an underlying

cause of action for age discrimination, a payment made pursuant

to the Age Discrimination in Employment Act of 1967 is not

excludable from income under section 104(a)(2).   Age

Discrimination in Employment Act of 1967 (ADEA), Pub. L. 90-202,

81 Stat. 602 (current version at 29 U.S.C. secs. 621-634 (1994)).



     Petitioner, however, has not limited his arguments to claims

brought against IBM under the ADEA.   Rather, petitioner asserts

that he released IBM from liability for "potential tort claims,"

which would include a claim for age discrimination under the

ADEA, but which would not exclude for example, a common law cause

of action for emotional distress.   To support his position,

petitioner relies on the following language in Schleier v.

Commissioner, supra at 332 n.6, for the proposition that

"intangible harms of discrimination can constitute personal

injury, and that compensation for such harms may be excludable

under §104(a)(2)."

     Viewing the facts in the light most favorable to petitioner,

it can be argued that petitioner had a potential tortlike cause

of action for infliction of emotional distress.   Thus, we find,
                                - 9 -


for purposes of this motion only, that petitioners have met the

first prong of excludability under section 104(a)(2).

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

release in this case is the same as that in Brennan v.

Commissioner, T.C. Memo. 1997-317, and 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

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.    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.    Respondent argues that petitioner's

failure to lodge any informal or legal tortlike claim against IBM

prior to and at the time of signing the release establishes that

there was no bona fide dispute between petitioner and IBM that

could provide the basis for settlement.

     To prevail under section 104(a)(2), petitioner is not

required to have asserted a legal claim agaist IBM prior to

signing the release; however, the absence of any knowledge of the

claim on the part of the employer-payor obviously has a negative
                               - 10 -


impact in determining the requisite intent of the payment.

Brennan v. Commissioner, supra;     Sodoma v. Commissioner, supra;

see also Keel v. Commissioner, T.C. Memo. 1997-278; Foster v.

Commissioner, T.C. Memo. 1996-26.       Respondent further argues

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, the amount of the $74,985 lump-sum payment

was calculated on the number of years of service and petitioner's

salary.    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 Brennan v. Commissioner, supra, Sodoma

v. Commissioner, supra, and Webb v. Commissioner, supra, the

lump-sum payment herein appears to have been severance pay rather

than a payment for personal 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 $74,985 was based on years
                             - 11 -


of service and rate of pay points in the direction of its having

been severance pay rather than a payment for personal injury.

See Brennan v. Commissioner, supra, which involved the same payor

and the same plan as involved herein.

     In sum, viewing the facts in the light most favorable to

petitioner, we conclude that respondent has made a prima facie

case to support a motion for summary judgment and that petitioner

has failed to come forward with countervailing assertions having

sufficient specificity to cause us to hold that there is any

material issue of fact which requires a trial.    Accordingly, we

hold that respondent's motion for summary judgment will be

granted.

     To reflect the foregoing,



                                 An appropriate order and decision

                         will be entered granting respondent's

                         motion for summary judgment.
