                  T.C. Summary Opinion 2003-55



                     UNITED STATES TAX COURT



          EMANOIL AND MAGDALENA GANTEA, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6222-02S.                Filed May 19, 2003.


     Emanoil Gantea, pro se.

     James Brian Urie, for respondent.



     POWELL, Special Trial Judge:   This case was heard pursuant

to the provisions of section 74631 of the Internal Revenue Code

in effect at the time the petition was filed.    The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.

     Respondent determined a deficiency of $4,286 in petitioners’


     1
        Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year in issue.
                                 - 2 -

1999 Federal income tax.    The issue is whether petitioners may

exclude from gross income under section 104(a)(2) payments

received by petitioner Emanoil Gantea (petitioner) from his

employer pursuant to a settlement agreement.    Petitioners resided

in Womelsdorf, Pennsylvania, at the time the petition was filed.

                             Background

       Petitioner was employed with the Dana Corporation (Dana).

Petitioner experienced a work-related injury.    Dana sponsored a

program for employees who suffered injuries and are disabled, to

some extent, as a result of work-related injuries.    Employees in

the so-called Restricted Duty Program were required to report to

work and remain in a restricted duty area for the entire work

day.    Participants in this program were assigned there in lieu of

receiving workers’ compensation benefits.

       On March 24, 1995, petitioner, as a member of a class action

suit, filed a complaint in the Pennsylvania Court of Common Pleas

of Berks County alleging three separate causes of action.    First,

petitioner alleged that Dana violated the Pennsylvania Wire

Tapping and Electronic Surveillance Control Act, 18 Pa. Cons.

Stat. Ann. sec. 5725 (West 2003), by surreptitiously placing a

video camcorder in the restricted duty area for audio and visual

surveillance of the employees.    Second, petitioner alleged that

Dana invaded petitioner’s privacy when Dana posted on a bulletin

board at Dana’s employee information centers documents containing
                               - 3 -

a list of all Dana employees participating in the Restricted Duty

Program.   These documents also disclosed each employee’s name,

job description, and the specific nature of their injury or

illness.   Third, petitioner alleged “Intentional Infliction of

Emotional Distress” when Dana posted, at various locations of the

workplace, cartoons, photographs, and other materials intended to

ridicule, harass, and intimidate employees in the Restricted Duty

Program.

     In 1999, petitioner and Dana entered into a settlement

agreement.   The settlement agreement stated in pertinent part:

     * * * [Petitioner], in a three count Complaint, alleged that
     Dana had violated * * * [his] rights under various
     Pennsylvania statutes and its common laws including, (i)
     violations of the Pennsylvania Wiretapping and Electronic
     Surveillance Act (“Wiretap Act”), 18 Pa. Cons. Stat. §§
     5701-26 (Supp. 1995); (ii) the common law tort of invasion
     of privacy; and (iii) the common law tort of intentional
     infliction of emotional distress.

     *         *         *         *         *         *          *

          1.   Payment. Dana will pay a total of thirty
     thousand, two hundred and eleven dollars and sixty-six cents
     ($30,211.66), in exchange for the withdrawal with prejudice
     of * * * [petitioner’s] civil action against Dana. Payments
     will be made by check, jointly payable to * * * [petitioner]
     and his attorney * * *. This amount includes any and all
     payment on account of * * * [petitioner’s] attorneys fees.

     *         *         *         *         *         *          *

          11. Taxes and Reporting. Dana will issue a federal
     tax form 1099. As there is no claim for back wages by * * *
     [petitioner], Dana will not withhold any taxes on the
     settlement proceeds. The parties agree, however, that the
     absence of tax withholdings by Dana does not mean that a
     taxation authority or authorities may not subsequently treat
     the proceeds as taxable income.
                                - 4 -

     Dana issued petitioner a Form 1099-MISC, Miscellaneous

Income, reporting a payment of $30,211.66 of “nonemployee

compensation”.   Petitioners did not report the $30,211.66 damage

award on their 1999 Federal income tax return.    Respondent

determined that the damage award should have been included in

petitioners’ gross income.   Petitioners have stipulated that “No

portion of the settlement proceeds was paid to petitioner-husband

on account of personal physical injuries or physical sickness.”

                             Discussion

     Section 61 provides that “gross income means all income from

whatever source derived”.    Gross income is an inclusive term with

broad scope, designed by Congress to “exert * * * ‘the full

measure of its taxing power.’” Commissioner v. Glenshaw Glass

Co., 348 U.S. 426, 429 (1955) (quoting Helvering v. Clifford, 309

U.S. 331, 334 (1940)).   Conversely, statutory exceptions from

income shall be narrowly construed.     Commissioner v. Schleier,

515 U.S. 323, 328 (1995).    Furthermore, “exemptions from taxation

are not to be implied; they must be unambiguously proved.”

United States v. Wells Fargo Bank, 485 U.S. 351, 354 (1988).

     Section 104(a)(2) excludes 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”.   Section 1.104-1(c), Income Tax Regs., defines
                                 - 5 -

“damages received” as “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 such prosecution.”    Amounts are

excludable from gross income only when (1) the underlying cause

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

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

personal injuries or sickness.     Commissioner v. Schleier, supra

at 337.

     Where amounts are received pursuant to a settlement

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

settlement controls whether such amounts are excludable under

section 104(a)(2).     United States v. Burke, 504 U.S. 229, 237

(1992).   Determination of the nature of the claim is a factual

inquiry and is generally made by reference to the settlement

agreement.     Robinson v. Commissioner, 102 T.C. 116, 126 (1994),

affd. in part and revd. in part 70 F.3d 34 (5th Cir. 1995).

“[W]here an amount is paid in settlement of a case, the critical

question is, in lieu of what was the settlement amount paid”.

Bagley v. Commissioner, 105 T.C. 396, 406 (1995), affd. 121 F.3d

393 (8th Cir. 1997).    An important factor in determining the

validity of the agreement is the “intent of the payor” in making

the payment.     Knuckles v. Commissioner, 349 F.2d 610, 613 (10th

Cir. 1965), affg. T.C. Memo. 1964-33.    If the payor’s intent
                                  - 6 -

cannot be clearly discerned from the settlement agreement, the

intent of the payor must be determined from all the facts and

circumstances of the case, including the complaint filed and

details surrounding the litigation.       Robinson v. Commissioner,

supra at 127.

     We start our analysis with the second requirement of

Commissioner v. Schleier, supra.      The “taxpayer must show that

the damages were received ‘on account of personal injuries or

sickness.’”     Id. at 337.   Subsequent to the Court’s opinion in

Schleier, Congress amended section 104(a)2 to provide that

amounts are excludable only if received “on account of personal

physical injuries or physical sickness”.      Sec. 104(a)(2)

(emphasis added).

     Petitioners stipulated that no portion of the damages was

paid on account of “physical injuries or physical sickness”, and

that should end the matter.

     To the extent, however, that petitioners contend that they

should not be bound by the stipulation of facts,3 even if they

had not entered into the stipulation, the result is the same.


     2
        Small Business Job Protection Act of 1996, Pub. L. 104-
188, sec. 1605, 110 Stat. 1838, effective for amounts received
after Aug. 20, 1996.
     3
        In their posttrial memorandum, petitioners suggest that
they were unduly pressured into signing the stipulation of facts.
For the reasons stated above, we do not find it necessary to
decide that issue. We note, however, there is nothing in the
record to support that allegation.
                               - 7 -

The settlement agreement did not allocate the award to any

specific type of damages.   The settlement agreement referenced

the three claims alleged by petitioner in the complaint, and

petitioner alleged that he suffered “extreme humiliation”,

“embarrassment”, and “severe emotional distress” as a result of

Dana’s conduct.

     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.”   Assuming

petitioner did receive damages for his emotional distress,

humiliation, and embarrassment, that award would not be

excludable under section 104(a)(2).    As to his argument that he

received the award on account of personal physical injury, not

only is this argument precluded by the stipulation of facts and

the settlement agreement, but petitioner failed to provide any

documentary or testimonial evidence that Dana compensated him,

through the settlement award, for such an injury.4

     We need not address whether “the underlying cause of action

giving rise to the recovery * * * [was] ‘based upon tort or tort

type rights’”, Commissioner v. Schleier, supra at 337, as we find
that the settlement proceeds were not based on personal physical

injuries or sickness.   We hold that the $30,211.66 damage award

is not excludable under section 104(a)(2).


     4
        Sec. 7491(a), concerning burden of proof, has no bearing
on the underlying substantive issue.
                             - 8 -

    Reviewed and adopted as the report of the Small Tax Case

Division.

                                          Decision will be entered

                                     for respondent.
