                        T.C. Memo. 2011-295



                     UNITED STATES TAX COURT



         SYED A. AND RAFIUNNISA R. AHMED, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5080-10.              Filed December 22, 2011.



     Syed A. and Rafiunnisa R. Ahmed, pro sese.

     Tammra S. Mitchell, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     WELLS, Judge:   Respondent determined a deficiency of $22,185

in petitioner’s 2007 Federal income tax and an accuracy-related

penalty of $4,437 pursuant to section 6662(a).1   The issues we


     1
      Unless otherwise indicated, section references are to the
Internal Revenue Code of 1986, as amended and in effect for the
year at issue, and Rule references are to the Tax Court Rules of
Practice and Procedure.
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must decide are whether proceeds from the settlement of an

employment discrimination lawsuit are excludable from gross

income pursuant to section 104(a)(2) and whether petitioner is

liable for the accuracy-related penalty pursuant to section

6662(a).

                         FINDINGS OF FACT

     Some of the facts and certain exhibits have been stipulated.

The parties’ stipulations of facts are incorporated in this

opinion by reference and are found accordingly.   At the time they

filed their petition, petitioners were residents of Georgia.

     Syed A. Ahmed (petitioner) was born in India but immigrated

to the United States, and he became a U.S. citizen in 1999.

Petitioner is a practicing Muslim.

     In 1990 Fulton County hired petitioner as a programmer in

its information technology department.   In 1999 petitioner was

promoted to the position of systems analyst.

     During his employment with Fulton County petitioner filed

several complaints with State and Federal agencies alleging

discrimination.   On July 11, 2006, he filed a complaint in the

U.S. District Court for the Northern District of Georgia, seeking

damages and injunctive relief against Fulton County.

     In that complaint, petitioner raised claims pursuant to 42

U.S.C. section 1983 that his constitutional rights had been

violated under the color of State law; that he had been
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discriminated against on the basis of his race, religion, and

national origin in violation of title VII of the Civil Rights Act

of 1964; that Fulton County had retaliated against him for filing

complaints alleging discrimination in violation of title VII of

the Civil Rights Act of 1964; that he had been terminated and

denied access to public buildings on the basis of his race in

violation of 42 U.S.C. section 1981; and that he had been

discriminated against in violation of the Age Discrimination in

Employment Act.   In his complaint, he prayed for the following

relief:   Backpay; back benefits; compensatory and punitive

damages from Fulton County; compensatory and punitive damages

from his former supervisor; liquidated damages; the recovery of

legal expenses; and the promotion he was denied.

     In support of his claims, he alleged numerous specific facts

regarding discriminatory treatment.    He alleged that, following

September 11, 2001, his coworkers and supervisors became hostile

towards him because of his Muslim faith.   He alleged that he was

terminated from his job in retaliation for filing a complaint

about his treatment with the Georgia Office of Equal Employment

Opportunity.   He alleged that his supervisors continued to harass

him even after he was terminated, arranging for Fulton County to

post flyers in all Fulton County buildings that prohibited him

from entering public buildings in Fulton County.   Petitioner had

a heart attack during August 2004, shortly after being terminated
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by Fulton County, and he alleged that the harassment he suffered

while employed by Fulton County contributed to his heart attack.

     Although petitioner was reinstated with backpay by the

Fulton County Personnel Board, he alleged that the harassment

continued and even grew worse after he was rehired.   He alleged

that, among other things, on his first day back on the job he was

assigned to work at a building where he was exposed to chemicals

that made him nauseated and dizzy and that required him to visit

the emergency room on the same day.    Although he filed a workers’

compensation claim for his hospitalization in January 2005, his

claim was denied by the Georgia State Board of Workers’

Compensation.   Petitioner alleged that, after he was reinstated,

his coworkers and supervisors continued to harass him because of

his religious beliefs.

     On October 4, 2007, petitioner signed a settlement agreement

in which he agreed to the dismissal of his lawsuit against Fulton

County in exchange for $150,000 (settlement agreement).   The

settlement agreement stated that it was intended to resolve the

suit brought by petitioner against Fulton County for “violations

of Title VII of the Civil Rights Act of 1964, First and

Fourteenth Amendments of the United States Constitution and a

violation of Section 1983.”   The settlement agreement provided

that petitioner agreed to release Fulton County from any right to

damages he may have had for “personal injuries, contractual
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damages, losses and damage to personal property, or any other

losses or expenses of any kind (including attorneys’ fees)

arising from” any actions or omissions of Fulton County.      As a

condition of the settlement agreement, petitioner also agreed to

retire from his employment with Fulton County.

     Petitioner’s attorney received the $150,000 pursuant to the

settlement agreement, deducted attorney’s fees of $60,000, and

distributed the remaining $90,000 to petitioner.      The attorney’s

law firm issued petitioner a Form 1099-MISC, Miscellaneous

Income, which stated that he received income of $90,000 from the

settlement agreement.    Petitioner did not report that income on

his tax return.   However, he did include a prominently inscribed

asterisk next to the line for reporting wages on his Form 1040,

U.S. Individual Income Tax Return.      In a note at the bottom of

the return, he wrote:    “Discrimination Law Suite [sic] settled

with Fulton County Govt; (Employer) towards Expenses + Losses for

15 years in the case.”

     Respondent issued a notice of deficiency to petitioner dated

November 30, 2009.   In the notice of deficiency, respondent

determined that petitioner’s income should be increased by

$90,000 because of the income from the settlement agreement.

Petitioner timely filed his petition with this Court.
                                 - 6 -

                                OPINION

     As a general rule, the Commissioner’s determinations set

forth in a notice of deficiency are presumed correct, and the

taxpayer bears the burden of proving otherwise.       Rule 142(a);

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

     Gross income generally includes all income from whatever

source derived.   Sec. 61(a).   The definition of gross income is

broad in scope, while exclusions from income are narrowly

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

Damages (other than punitive) received on account of personal

physical injuries or physical sickness may generally be excluded

from gross income.   Sec. 104(a)(2).      For the damages to be

excluded under this provision, the underlying cause of action

must be based in tort or tort-type rights and the proceeds must

be damages received on account of personal physical injury or

sickness.    Commissioner v. Schleier, supra at 337.

     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).   Whether the settlement payment is excludable from gross

income under section 104(a)(2) depends on the nature and the

character of the claims asserted in the lawsuit.       See Bent v.

Commissioner, 87 T.C. 236, 244 (1986), affd. 835 F.2d 67 (3d Cir.
                                 - 7 -

1987); Church v. Commissioner, 80 T.C. 1104, 1106-1107 (1983).

To justify exclusion from income under section 104, petitioner

must show that his settlement proceeds were in lieu of damages

for physical injuries or physical sickness.    See Green v.

Commissioner, 507 F.3d 857, 867 (5th Cir. 2007), affg. T.C. Memo.

2005-250; Bagley v. Commissioner, 105 T.C. 396, 406 (1995), affd.

121 F.3d 393 (8th Cir. 1997).    The determination of the nature of

the underlying claim is factual.     Bagley v. Commissioner, supra

at 406; Robinson v. Commissioner, 102 T.C. 116, 126 (1994), affd.

in part, revd. in part and remanded on another issue 70 F.3d 34

(5th Cir. 1995).

     Where there is a settlement agreement, the determination of

the nature of the claim is usually made by reference to the

agreement.   See Knuckles v. Commissioner, 349 F.2d 610, 613 (10th

Cir. 1965), affg. T.C. Memo. 1964-33; Robinson v. Commissioner,

supra at 126.    If the settlement agreement lacks express language

stating what the amount paid pursuant to that agreement was to

settle, the intent of the payor is critical to that

determination.     Knuckles v. Commissioner, supra at 613; see also

Agar v. Commissioner, 290 F.2d 283, 284 (2d Cir. 1961), affg. per

curiam T.C. Memo. 1960-21.    Although the belief of the payee is

relevant to that inquiry, the character of the settlement payment

hinges ultimately on the dominant reason of the payor in making

the payment.     Agar v. Commissioner, supra at 284; Fono v.
                               - 8 -

Commissioner, 79 T.C. 680, 696 (1982), affd. without published

opinion 749 F.2d 37 (9th Cir. 1984).

     Petitioner contends that the payment he received from his

settlement agreement was to compensate him for his physical

injuries, i.e., his heart attack and the dizziness and vomiting

he experienced the day he returned to work, which required him to

be treated in the emergency room.   Although it did mention

“personal injuries” among a boilerplate list of other claims from

which he agreed to release Fulton County, the settlement

agreement did not allocate any portion of the payment to

compensate petitioner for his physical injuries.    We have held

that the nature of underlying claims cannot be determined from a

general release that is broad and inclusive.    See Connolly v.

Commissioner, T.C. Memo. 2007-98.     As part of the settlement

agreement, petitioner also agreed to retire from his employment

with Fulton County, suggesting that at least part of the payment

should be considered severance pay.

     The complaint itself, although it mentioned petitioner’s

physical injuries, did not specifically seek relief for those

physical injuries.   Instead, it sought backpay, back benefits,

liquidated damages, attorney’s fees, and compensatory and

punitive damages for intentional discrimination.    The complaint

never connected petitioner’s heart attack or other physical

injuries with petitioner’s claims for damages.
                               - 9 -

     Given that the complaint placed little emphasis on

petitioner’s physical injuries, that the settlement agreement’s

only mention of “personal injuries”2 was in boilerplate, and that

the record in the instant case contains no other evidence showing

that any part of the settlement was for personal injuries, we

conclude that petitioner has failed to prove that it was Fulton

County’s intent to compensate him for his physical injuries.

Rather, it appears that one of Fulton County’s primary

motivations was securing his retirement, and, consequently, at

least a portion of the amount petitioner received should be

considered severance pay.   Petitioner has the burden of proof on

the issue, and he has failed to show that any portion of the

amount he received pursuant to the settlement agreement was to

compensate him for physical injuries.   Accordingly, we sustain

respondent’s determination that the $90,000 petitioner received

under the terms of the settlement agreement is taxable.

     The second issue we consider is whether petitioner is liable

for the accuracy-related penalty pursuant to section 6662(a).

Generally, the Commissioner bears the burden of production with

respect to any penalty, including the accuracy-related penalty.

Sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

To meet that burden, the Commissioner must come forward with


     2
      We also note that “personal injuries” is a broader category
than “physical injuries.” See Venable v. Commissioner, T.C.
Memo. 2003-240, affd. 110 Fed. Appx. 421 (5th Cir. 2004).
                                - 10 -

sufficient evidence indicating that it is appropriate to impose

the relevant penalty.    Higbee v. Commissioner, supra at 446.     The

Commissioner has the burden of production only; the ultimate

burden of proving that the penalty is not applicable remains on

the taxpayer.    Id.

     Subsection (a) of section 6662 imposes an accuracy-related

penalty of 20 percent of any underpayment that is attributable to

causes specified in subsection (b), including a “substantial

understatement” of income tax.    There is a “substantial

understatement” of income tax for any tax year where the amount

of the understatement exceeds the greater of 10 percent of the

tax required to be shown on the return for the tax year or

$5,000.   Sec. 6662(d)(1)(A).   In his petition, petitioner failed

to assign error to respondent’s determination to impose a penalty

pursuant to section 6662(a).    We have held that a taxpayer who

fails to assign error to a penalty is deemed under Rule 34(b)(4)

to have conceded the penalty, notwithstanding that the

Commissioner failed to produce evidence that the imposition of

the penalty was appropriate.    See Swain v. Commissioner, 118 T.C.

358 (2002).   Moreover, petitioner failed to raise the issue at

trial.    Accordingly, we sustain respondent’s determination of the

section 6662(a) penalty.
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     In reaching these holdings, we have considered all the

parties’ arguments, and, to the extent not addressed herein, we

conclude that they are moot, irrelevant, or without merit.

     To reflect the foregoing,


                                        Decision will be entered

                                   for respondent.
