                       T.C. Memo. 1997-559



                     UNITED STATES TAX COURT



             STANLEY AND GAIL LABER, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14800-96.                  Filed December 22, 1997.



     Stanley and Gail Laber, pro sese.

     Claire R. McKenzie, for respondent.


                       MEMORANDUM OPINION

     GOLDBERG, Special Trial Judge:   This case was heard pursuant

to section 7443A(b)(3) and Rules 180, 181, and 182.1   Respondent

determined a deficiency in petitioners’ Federal income tax for


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

the year 1992 in the amount of $2,640.   The issue for decision is

whether petitioners may exclude from gross income under section

104(a)(2) the $11,000 received by Stanley Laber (petitioner) from

his former employer pursuant to a settlement agreement.

     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.   Petitioners resided in

Lincolnwood, Illinois, at the time that they filed their

petition.

     Around 1986, petitioner accepted a position as head of

information management and logistics with a division of the U.S.

of the Army Corps of Engineers (referred to sometimes as the

Army) in Chicago, Illinois.   In this position, petitioner

reported to a military officer, the deputy to Colonel Franco.

Petitioner also had some contact with Colonel Franco, and these

interactions were the cause of some conflict.

     Petitioner is a practicing Orthodox Jew.   Petitioner felt

that Colonel Franco created a hostile work environment and that

he was particularly antagonistic toward petitioner as a result of

petitioner's religious faith.   On one occasion, petitioner's co-

workers attempted unsuccessfully to contact him at home on a

Saturday to report a problem within his area of responsibility.

Petitioner perceived that Colonel Franco viewed petitioner's
                                3

observation of the Saturday Sabbath as a lack of dedication to

his job.

     Petitioner suffers from asthma.   His condition was

apparently exacerbated by the circumstances at work.    Petitioner

experienced other physical ailments, including kidney stones and

depression while working for the Army.

     During petitioner's employment with the Army, petitioner

filed numerous Equal Employment Opportunity (EEO) complaints and

Merit System Protection Board (MSPB) appeals.   The record

contains eight EEO complaints filed by petitioner between March

27, 1991, and July 29, 1992.   Petitioner alleged that he was the

victim of various forms of discrimination including religious,

retaliation, sex, and age.   Four of the complaints were filed

with respect to activity that occurred on or before November 21,

1991.   In five of the complaints petitioner alleged that he was

not considered or selected for a position or the opening was

withdrawn because of, among other things, his religion and his

past propensity to file EEO complaints.   In these complaints,

petitioner sought corrective action in the form of:    "the

position I applied for"; "the position or similar position and

any other benefit I would have had, absent the discrimination";

"to be made whole absent the discrimination"; "to be made whole

absent the discrimination such as the position with back pay";

and "all the benefits that would have been granted absent the
                                4

discrimination and restoration of priority consideration".    In

two of the complaints petitioner alleged that the EEO office

discriminated against him as reprisal for his filing previous

complaints.   In the remaining complaint, petitioner alleged that

in December 1988, Colonel Franco ordered him to attend a

Christmas party and that he did not receive administrative leave

because he did not attend.   As corrective action in the complaint

petitioner requested that the policy be changed "to exclude

religion".

     On November 12, 1992, petitioner and the Department of the

Army entered into a negotiated settlement agreement.   The

settlement agreement states:

     1.   In the interest of promoting its Equal Employment
     Opportunity Program and to avoid protracted litigation, the
     Army and the Complainant agree to settle ALL matters
     involved in any and all informal or formal EEO complaints
     and Merit System Protection Board appeals in any stage
     whatsoever, including but not limited to matters before the
     Equal Employment Opportunity Commissioner and the Federal
     courts, filed by the Complainant against the United States
     Army Corps of Engineers, Chicago District and the North
     Central Division and the complainant authorizes the
     immediate dismissal of all such complaints or appeals
     complaints without cost to the Army Corps of Engineers,
     including dismissal at the Agency level, Equal Employment
     Opportunity, or Federal court levels.
                              * * *
     3.   In consideration for the settlement of the above noted
     EEO complaints the complainant agrees not to apply for any
     position at either the Chicago District or the North Central
     Division for the period of six (6) years from the date of
     this Agreement.
     4.   By entering this agreement, the Army does not admit
     that it has violated the Civil Rights Act of 1964, as
     amended, or any other Federal or State statute or
     regulation.
                                 5

By the terms of the agreement, petitioner was paid $11,000 in

consideration for the settlement of the EEO complaints and MSPB

appeals.

     Sandy Soloman, regional counsel for the Army, drafted the

settlement agreement.    Petitioners were paid $11,000 by the Army

on December 1, 1992.    Petitioners did not include any of the

settlement proceeds in gross income reported on their Federal

income tax return filed for 1992.    In the notice of deficiency,

respondent increased petitioners' taxable income by $11,000 to

reflect the amount of settlement proceeds received by petitioners

from the Army.

     Petitioners contend that the settlement proceeds were paid

to petitioner to settle his claims for damages for personal

injuries and that the $11,000 is excludable from income under

section 104(a)(2).

     Respondent's determination is presumed correct, and

petitioners bear the burden of proving it erroneous.    Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

     Section 61 broadly defines gross income to include all

income from whatever source derived, except as otherwise

provided.    Statutory exclusions from income are narrowly

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

     Section 104(a)(2) provides that gross income does not

include "the amount of any damages received (whether by suit or
                                  6

by agreement * * * ) on account of personal injuries or

sickness".   Section 1.104-1(c), Income Tax Regs., provides that

the term "damages received" "means an amount received (other than

workmen's compensation) 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 prosecution."

Petitioner's settlement proceeds may be excluded from gross

income only if petitioners show that:      (1) the underlying cause

of action giving rise to the recovery is based upon tort or tort

type rights and (2) the damages were received on account of

personal injuries or sickness.    Commissioner v. Schleier, supra

at 337.

     Whether damages received pursuant to a settlement agreement

are excludable under section 104(a)(2) depends on the nature of

the underlying claim, not the validity of such claim.      United

States v. Burke, 504 U.S. 229, 237 (1992).      Determination of the

nature of the claim is factual.       Bagley v. Commissioner, 105 T.C.

396 (1995), affd. 121 F.3d 393 (8th Cir. 1997).      Where the

settlement agreement lacks express language stating what the

payment was made on account of, the most important element is the

intent of the payor.   Knuckles v. Commissioner, 349 F.2d 610

(10th Cir. 1965), affg. T.C. Memo. 1964-33; Robinson v.

Commissioner, 102 T.C. 116, 126 (1994), affd. in part and revd.

in part 70 F.3d 34 (5th Cir. 1995).
                                   7

     A tort is a "'civil wrong, other than breach of contract,

for which the court will provide a remedy in the form of an

action for damages.'"    United States v. Burke, supra at 234

(quoting Keeton et al., Prosser and Keeton on the Law of Torts 2

(5th ed. 1984)).    Tort remedies may redress intangible elements

of injury that are deemed important, even though not pecuniary in

their immediate consequences.      Id. at 235.   These injuries may

include emotional distress, personal humiliation, and mental

anguish.    Id. at 235-236.

     In United States v. Burke, supra, the Supreme Court held

that recoveries received for the settlement of claims based on

Title VII of the Civil Rights Act of 1964, Pub. L. 88-352, 78

Stat. 253, are not excludable from gross income under section

104(a)(2) because the Act did not provide remedies for personal

injuries.   In Commissioner v. Schleier, supra, the Supreme Court

held that recoveries for claims based on the Age Discrimination

in Employment Act of 1967 (ADEA), Pub. L. 90-202, 81 Stat. 602,

are not excludable from gross income because the ADEA provides no

compensation "for any of the traditional harms associated with

personal injury."    Id. at 336.   Effective November 21, 1991,

Congress amended title VII to permit the recovery of compensatory

and punitive damages for certain violations.      Civil Rights Act of

1991, Pub. L. 102-166, sec. 102, 105 Stat. 1071, 1072-1073.
                                8

     Four of petitioner's EEO claims allege discriminatory

conduct that potentially violates the Civil Rights Acts of 1964

and the ADEA.   Thus, assuming arguendo, the settlement proceeds

were received as a result of these claims, to such extent the

proceeds would not be excludable from petitioners' gross income.

More importantly, petitioners have failed to establish that any

portion of the settlement proceeds was received on account of

physical injury or sickness and thus excludable from income under

section 104(a)(2).

     The settlement agreement does not expressly state what

specific claims the agreement covered.    However, considering the

record as a whole, we do not think the Army intended to

compensate petitioner for physical or emotional injury.    Mr.

Soloman testified that his primary intent was to prevent

petitioner from filing any additional costly complaints for a

reasonable period of time and to offer sufficient compensation to

satisfy petitioner.   Mr. Soloman recalled that petitioner had 11

outstanding claims, 10 EEO claims, and 1 MSPB appeal at the time

that the settlement was reached.    Each claim costs the Army

somewhere between $3,000 and $5,000 to investigate and resolve.

Mr. Soloman testified that although the claims were without

merit, he thought $11,000 was fair as measured by $1,000 per

claim, and that no one claim was any more compelling than

another.
                                 9

     Petitioners testified that petitioner suffered physical

injuries while working for the Army.    Mr. Soloman testified that

he had no knowledge of petitioner’s sustaining any medical,

physical, or mental injuries, nor did petitioner present him with

evidence of medical expenses.    Furthermore, none of the eight EEO

complaints contained in the record alleges that petitioner

incurred any type of physical injury or sickness as a result of

the alleged discriminatory conduct.    Petitioner also testified

that he had taken the initial steps to file a lawsuit against

Colonel Franco for slander; however, the record contains no

documentary evidence of this claim.    Mr. Soloman was not aware of

any claim by petitioner that Colonel Franco had committed

slander.

     Petitioners have not established that any portion of the

$11,000 received pursuant to petitioner's settlement agreement

with the Army is excludable from gross income.    Therefore,

respondent is sustained on this issue.

     We have considered all arguments by the parties, and, to the

extent not discussed above, find them to be irrelevant or without

merit.

     To reflect the foregoing,


                                           Decision will be entered

                                      for respondent.
