                        T.C. Memo. 1997-126



                      UNITED STATES TAX COURT



                  REINA MARTINEZ, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 27007-95.                     Filed March 11, 1997.



     Jack F. Bonanno, for petitioner.

     Allan D. Hill, for respondent.



                        MEMORANDUM OPINION


     FOLEY, Judge:   By notice dated October 5, 1995, respondent

determined a deficiency in petitioner's 1991 Federal income tax

of $159,551.   After concessions, the issue for decision is

whether petitioner, pursuant to section 104(a)(2), is entitled to
                                - 2 -

exclude amounts received in settlement of a class action suit.

We hold she is not.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code as in effect for the year in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

                             Background

     The facts have been fully stipulated under Rule 122 and are

so found.    At the time the petition was filed, petitioner resided

in San Francisco, California.

     In the fall of 1974, petitioner sought the entry-level sales

position of trainee agent with State Farm Insurance Co. (State

Farm).   State Farm's agents discouraged petitioner from pursuing

such a position.

     On June 1, 1979, a class action suit was filed in the U.S.

District Court for the Northern District of California,

Kraszewski v. State Farm Gen. Ins. Co..    The plaintiffs in the

class action alleged that State Farm, in violation of title VII

of the Civil Rights Act of 1964 (Title VII), had discriminated

against women in the hiring of its insurance agents.   On November

6, 1981, the District Court bifurcated the litigation into a

liability and a remedy phase.

     On April 29, 1985, the District Court ruled in the liability

phase that State Farm was liable under Title VII for classwide
                               - 3 -

discrimination on the basis of sex.    Specifically, it ruled that

women who attempted to become trainee agents were "lied to,

misinformed, and discouraged in their efforts to obtain the entry

level sales position."   The court found State Farm liable with

respect to "all female applicants and deterred applicants who, at

any time since July 5, 1974, have been, are, or will be denied

recruitment, selection and/or hire as trainee agents by defendant

companies within the State of California."    Petitioner ultimately

joined the class action suit against State Farm.

     The parties to the class action subsequently reached an

agreement in a consent decree as to the remedy phase of the

litigation.   The consent decree provided for informal individual

hearings before a special master to determine whether each

claimant was entitled to damages and the amount of such damages.

In October of 1990, petitioner's hearing was held before a

special master who, on January 16, 1991, ruled that State Farm

had discriminated against petitioner.   On January 28, 1991, State

Farm issued a $653,230 check payable to petitioner and her

attorney.   Petitioner's attorney retained legal fees of $163,308,

and the $489,922 balance was paid to petitioner.

     On her 1991 Federal income tax return, petitioner excluded

the $653,230 payment from her gross income.   Respondent

determined that the entire amount should have been included in

petitioner's gross income.   The petition in this case was filed

on December 28, 1995.
                                 - 4 -

                              Discussion

     Except as otherwise provided, gross income includes income

from all sources.    Sec. 61; Commissioner v. Glenshaw Glass Co.,

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

construed, statutory exclusions from income must be narrowly

construed.   Commissioner v. Schleier, 515 U.S. ___, 115 S. Ct.

2159, 2163 (1995).

     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 that "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 tort type rights and

(2) on account of personal injuries or sickness.     Commissioner v.

Schleier, 515 U.S. at ___, 115 S. Ct. at 2166-2167.

     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); Robinson v. Commissioner, 102 T.C. 116, 126 (1994), affd.
                                - 5 -

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

The critical question is "in lieu of what was the settlement

amount paid?"    Bagley v. Commissioner, 105 T.C. 396, 406 (1995).

Determination of the nature of the claim is a factual inquiry.

Robinson v. Commissioner, supra at 127.

       The amounts petitioner received under the settlement

agreement were intended to settle petitioner's claim under Title

VII.    As a result, the U.S. Supreme Court's decision in United

States v. Burke, supra, controls.    In Burke, the Court considered

whether amounts received in settlement of a claim under Title VII

were excludable under section 104(a)(2).    The Court analyzed

Title VII and concluded that it did not provide for remedies to

recompense claimants for tort type personal injuries.    Instead,

the Court noted that the statute offered only injunctions, back

and front pay, and other equitable relief.    Id. at 238-239.    As a

result, the Court concluded that Title VII did not redress a tort

type personal injury and consequently that settlement proceeds

based on such a claim are not excludable under section 104(a)(2).

       Petitioner contends that Burke is distinguishable.

Petitioner notes that the taxpayers in Burke were employed by the

defendant at the time of the discrimination and that the award

was essentially for a breach of contract.    Petitioner contends

that it was the contractlike violation that led the Court to the

conclusion that the Title VII damages were not excludable.      As a

result, petitioner contends that, consistent with Burke, an award
                               - 6 -

of back pay under Title VII may be excludable where the taxpayer

was not employed by the defendant at the time of the

discrimination.

     Petitioner's contention fails to grasp the central thrust of

Burke.   In Burke, the Supreme Court concluded that Title VII does

not provide remedies that redress tort type personal injuries.

That rationale does not depend upon the particular circumstances

of a taxpayer's claim under Title VII.   All claims under Title

VII, including petitioner's, are subject to the same limited

range of damages.   Consequently, we reject petitioner's

contention.

     Petitioner also contends that remedies available to her

under other laws redressed tort type personal injuries and that

the consent decree was partially intended to settle these claims.

Petitioner emphasizes that the consent decree indicated that

State Farm was concerned about its liability under other laws.

Petitioner has not established, however, that the payment under

the consent decree was intended to settle petitioner's claims

relating to other laws.   In addition, the consent decree failed

to allocate any portion of petitioner's recovery to the

settlement of other claims.   Consequently, petitioner has failed

to prove that any part of the recovery is excludable.   See Getty

v. Commissioner, 91 T.C. 160, 175-176 (1988), affd. on this

issue, revd. on other issues 913 F.2d 1486 (9th Cir. 1990).
                                  - 7 -

      Accordingly, we conclude that petitioner is not entitled to

exclude any part of the $653,230 recovery under section

104(a)(2).

      Petitioner also contends that she is entitled to exclude the

portion (i.e., $163,308) of the settlement used to pay legal

fees.   Respondent contends that the legal fees are deductible

under section 212(1) as an expense for the production of income

and treated as a miscellaneous itemized deduction under section

67.   We agree with respondent that the legal fees are deductible

to the extent they exceed 2 percent of petitioner's adjusted

gross income.   See Alexander v. Commissioner, 72 F.3d 938, 946

(1st Cir. 1995), affg. T.C. Memo. 1995-51; see also sec. 1.67-

1T(a)(1)(ii), Temporary Income Tax Regs., 53 Fed. Reg. 9875 (Mar.

28, 1988).

      We have considered all other arguments made by the parties

and found them to be either irrelevant or without merit.

      To reflect the foregoing,


                                            Decision will be entered

                                       under Rule 155.
