                       T.C. Memo. 2003-100



                     UNITED STATES TAX COURT



   MICHAEL THOMAS PRASIL AND LORI LYNN PRASIL, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3945-02.            Filed April 9, 2003.


     Michael Thomas Prasil and Lori Lynn Prasil, pro sese.

     Kathryn F. Patteron and Douglas R. Fortney, for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION


     ARMEN, Special Trial Judge:   This case was heard pursuant to

the provisions of section 7443A(b)(3)1 and Rules 180, 181, and

182 of the Tax Court Rules of Practice and Procedure.

     Respondent determined a deficiency in petitioners’


     1
        Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for 1999,
the taxable year in issue.
                               - 2 -

(hereinafter referred to individually as Mr. and Mrs. Prasil)

Federal income tax for the taxable year 1999 in the amount of

$2,183.

     After concessions by the parties,2 the issue for decision is

whether a $7,650 payment that Mrs. Prasil received in 1999 in

settlement of a claim against her former employer is excludable

from petitioners’ gross income under section 104(a)(2).   We hold

that it is not.

                         FINDINGS OF FACT

     Some of the facts were stipulated, and they are so found.

Petitioners resided in Iowa Park, Texas, at the time that the

petition was filed with the Court.

     For a few months ending in early 1995, Mrs. Prasil worked

for Heartland Realty Investors, Inc. (Heartland) in Rochester,

Minnesota.   Mrs. Prasil’s boss was an individual by the name of

Gary Lakner (Mr. Lakner).   Mrs. Prasil alleged that during her

brief tenure at Heartland, Heartland and Mr. Lakner subjected her

to sex discrimination and harassment.   The record does not

disclose the nature of the alleged sex discrimination that she

experienced.


     2
        Petitioners concede that they failed to report: (1)
Interest income, (2) pension and annuity income, and (3)
additional tax under sec. 72(t) on a premature distribution from
a qualified retirement plan. Respondent concedes that
petitioners are not liable for self-employment tax under sec.
1401, and hence they are not entitled to a self-employment tax
deduction under sec. 164(f).
                                - 3 -

Mrs. Prasil terminated her employment with Heartland in January

1995.

     When Mrs. Prasil commenced employment at Heartland, she had

been suffering from a clinical condition called “Sweet’s

syndrome”3 for a time period not disclosed by the record.   The

record does not definitively reveal the extent of Mrs. Prasil’s

symptoms before, during, and after her employment with Heartland.

At trial, however, Mrs. Prasil testified as follows:

     I got very ill. I had something called Sweet’s
     syndrome. And things that would happen to me made me
     much worse.

                    *   *   *    *      *   *   *

     Because of my condition and what this man put me
     through, my physical illness I had got a lot worse.
     And I ended up being in the hospital and different
     things because of it.

                    *   *   *    *      *   *   *

     They thought I had leukemia, too. And that’s what was
     causing the Sweet’s syndrome. They thought it was a
     big rash everywhere. And fever. I was really ill. I
     couldn’t walk on my legs and stuff.

Mr. Prasil further testified that Sweet’s syndrome attacks the

muscles and that Mrs. Prasil was “in the hospital for about a

little over a week” and that they incurred about “$8,000-9,000 in

hospital bills that she got from the abuse that she took from


     3
        Originally reported by Robert Sweet in 1964, “Sweet’s
syndrome” (a.k.a. acute febrile neutrophilic dermatosis) is a
rare skin disease characterized by fever and painful nodules
occurring on the extremities, face, and neck, and may have
accompanying myalgia, arthralgias, and arthritis.
                               - 4 -

this man down at work.”   The nature of the alleged abuse

inflicted on Mrs. Prasil and the precise reason for her

hospitalization are not in the record.

     Sometime in late 1995, Mrs. Prasil filed a complaint in the

Olmstead County District Court of Minnesota against Heartland and

Mr. Lakner (hereinafter referred to collectively as

Heartland/Lakner) “asserting claims of sex and reprisal

discrimination in violation of the Minnesota Human Rights Act,

violations of the Minnesota Whistleblower Act, Minn. Stat.

§181.932, and aiding and abetting discrimination in violation of

the Minnesota Human Rights Act against Lakner” (Heartland/Lakner

lawsuit).4   Petitioners did not present a copy of the complaint

to the Court.   Mrs. Prasil testified at trial, however, that she

sought recovery of an unspecified sum for monetary damages

including emotional and physical damages.

     During the pendency of the Heartland/Lakner lawsuit,

petitioners filed on May 16, 1997, a voluntary petition for

bankruptcy under chapter 7 of title 11 of the U.S. Code

(Bankruptcy Code) with the U.S. Bankruptcy Court for the District

of Minnesota (bankruptcy court).   On petitioners’   “Schedule B -



     4
        Generally, rights of action under the Minn. Human Rights
Act, Minn. Stat. Ann. ch. 363 (West 1991), and the Minn.
Whistleblower Act, Minn. Stat. Ann. sec. 181.932 (West 1991), may
be awarded compensatory and punitive damages and damages for
mental anguish or suffering. Minn. Stat. Ann. sec. 363.071,
subd. 2 (West 1991).
                                - 5 -

list of personal property” filed with the bankruptcy court, they

“identified the [Heartland/Lakner] lawsuit in progress as an

asset of unknown value”.    On August 20, 1997, the bankruptcy

court granted petitioners a discharge.    The bankruptcy court

eventually closed petitioners’ bankruptcy case on September 9,

1999.5

     During petitioners’ bankruptcy proceedings, the bankruptcy

court approved, by order dated October 14, 1997, the sale of the

bankruptcy estate’s interest in the Heartland/Lakner lawsuit to

Heartland for $5,500.   The bankruptcy court also identified

$7,650 as “Mrs. Prasil’s remaining interest in the lawsuit, the

portion of the lawsuit exempt from bankruptcy”.    Mrs. Prasil

testified that Heartland, however, did not pay her the specified

amount.   Therefore, in January 1999, Mrs. Prasil went back to

District Court in Minnesota to get her exemption value of the

Heartland/Lakner lawsuit from Heartland.    The District Court

purportedly ordered Heartland to pay Mrs. Prasil the $7,650

identified by the bankruptcy court as her exempt portion of the

Heartland/Lakner lawsuit.    Petitioners did not present a copy of

the complaint nor the District Court’s purported order to the

Court.



     5
        Petitioners did not present to the Court any of the
bankruptcy documents or orders, except for the bankruptcy court’s
docket sheet and only the first page of a document entitled
“Memorandum of Law in Opposition to Objection to Settlement”.
                               - 6 -

     At the same time of the District Court’s order, Mrs. Prasil

settled her sex discrimination claim against Heartland for

$7,650.   Between January 30, 1999, and February 5, 1999, Mrs.

Prasil and Heartland memorialized this settlement by executing a

document entitled “Settlement Agreement and Release” (settlement

agreement) wherein the parties agreed, in part, as follows:

     1. Consideration. In exchange for the release set
     forth herein, Heartland will pay to Prasil the sum of
     $7650 (Seven thousand, six hundred and fifty dollars).

     2. Release of Claims. In consideration of the
     obligations of Heartland contained herein, Prasil does
     hereby fully and completely release and waive any and
     all claims, complaints, causes of action or demands of
     whatever kind which she now has or may have against
     Lakner or Heartland * * * arising out of any actions,
     conduct, decisions, behavior or events occurring up to
     or on the date of her signature on this Agreement. BY
     THIS RELEASE, PRASIL GIVES UP ANY RIGHT TO MAKE OR
     CONTINUE TO PURSUE A CLAIM, BRING OR MAINTAIN A
     LAWSUIT, FILE AN ADMINISTRATIVE CHARGE OF
     DISCRIMINATION, OR OTHERWISE SEEK MONEY DAMAGES OR
     COURT ORDERS AS A RESULT OF HER EMPLOYMENT BY HEARTLAND
     OR HER SEPARATION FROM EMPLOYMENT WITH HEARTLAND.

          Prasil understands and accepts that this release
     specifically covers but is not limited to any and all
     claims, complaints, causes of action or demands which
     she has or may have against Lakner or Heartland
     relating to her employment and her separation from
     employment with Heartland whether based on statutory or
     common law claims (including age, sex, religion, race,
     national origin, disability or other discrimination
     arising under the Age Discrimination in Employment Act,
     Title VII of the Civil Rights Act of 1964, the
     Minnesota Human Rights Act, the Minnesota Whistleblower
     statute, and any other federal, state, or local
     statute, Executive Order or ordinance prohibiting
     employment discrimination), wrongful discharge, breach
     of contract, breach of any express or implied promise,
     misrepresentation, fraud, retaliation, breach of public
     policy, infliction of emotional distress, intentional
                               - 7 -

     interference with contract, negligence, defamation,
     promissory estoppel, invasion of privacy, or any other
     theory, whether legal or equitable.

The settlement agreement did not allocate the $7,650 settlement

payment among Mrs. Prasil’s causes of action or between monetary

damages, emotional damages, and physical damages.

     Pursuant to the settlement agreement, Mrs. Prasil received a

transmittal letter dated February 12, 1999, from Heartland’s

attorney enclosing a copy of the fully executed settlement

agreement and a settlement check from Heartland dated February

10, 1999, in the amount of $7,650.     Petitioners deposited the

settlement check in their checking account.     Subsequently,

Heartland issued a Form 1099-MISC, Miscellaneous Income (Form

1099), reporting “nonemployee compensation” of $7,650 paid to

Mrs. Prasil in 1999.   At trial, petitioners testified that they

did not receive the Form 1099-MISC, but they acknowledged receipt

of the $7,650 settlement payment from Heartland in 1999.

     Petitioners timely filed a joint Form 1040, U.S. Individual

Income Tax Return, for 1999 using the cash basis method of

accounting.   In that return, petitioners excluded from gross

income the $7,650 settlement payment that Mrs. Prasil received

from Heartland.

     On December 12, 2001, respondent issued a notice of

deficiency for 1999 to petitioners.     In the notice of deficiency,

respondent determined, inter alia, that petitioners failed to
                               - 8 -

report taxable nonemployee compensation of $7,650, which was

reported by Heartland on Form 1099.

                             OPINION6

     Petitioners do not dispute receiving the $7,650 settlement

payment from Heartland in 1999 to settle Mrs. Prasil’s sex

discrimination claim against Heartland.   Petitioners contend,

however, that the $7,650 settlement payment is not taxable

because it “was the amount exempted in our bankruptcy for my

discrimination lawsuit”.   In the alternative, petitioners contend

that respondent failed to file a proof of claim in their

bankruptcy proceeding.   Petitioners’ contentions are misplaced.

     The issue presented in the present case concerns an action

for redetermination of a deficiency for the taxable year 1999,7

which is a postbankruptcy Federal tax liability, and not the




     6
        Sec. 7491 does not apply in this case to shift the burden
of proof to respondent because petitioners neither alleged that
sec. 7491 was applicable nor established that they fully complied
with the requirements of sec. 7491(a)(2).
     7
        Sec. 451(a) requires income to be included in the
taxpayer’s gross income in the taxable year of receipt unless the
taxpayer’s accounting method would properly assign the income to
a different taxable period. For cash basis taxpayers, payments
received in settlements of lawsuits are included in income in the
year in which the payments are received unless otherwise
excludable. Sec. 451(a); Oates v. Commissioner, 18 T.C. 570,
584-585 (1952), affd. 207 F.2d 711 (7th Cir. 1953); Amend v.
Commissioner, 13 T.C. 178, 185 (1949); secs. 1.446-1(c)(1)(i),
1.451-1(a), Income Tax Regs. In the present case, petitioners
are cash basis taxpayers who received a settlement payment in
1999. Thus, the issue concerns petitioners’ taxable year 1999.
                              - 9 -

collection of a prebankruptcy Federal tax liability.8   Therefore,

the issue before us is a question of petitioners’ Federal income

tax liability under the Internal Revenue Code, Title 26, United

States Code, and not a question under the Bankruptcy Code, Title

11, U.S. Code.

     Respondent argues that the $7,650 settlement payment is

includable in petitioners’ gross income for 1999.   For the

reasons stated below, we agree.

     Section 61(a) provides that “gross income means all income

from whatever source derived” except as otherwise provided.    The

definition of gross income is broad in scope, Commissioner v.

Glenshaw Glass Co., 348 U.S. 426, 429-30 (1955), and exclusions

from gross income are narrowly construed, United States v. Burke,

504 U.S. 229, 248 (1992) (Souter, J., concurring in judgment);

Commissioner v. Jacobson, 336 U.S. 28, 49 (1949).

     As relevant to the present case, 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




     8
        See Swanson v. Commissioner, 65 T.C. 1180, 1184 (1976),
where this Court observed that an action brought for
redetermination of a deficiency “has nothing to do with
collection of the tax nor any similarity to an action for
collection of a debt”.
                               - 10 -

physical injuries or physical sickness”.9   The term “damages

received” 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.”   Sec. 1.104-1(c), Income Tax Regs.   Section 104(a)

further provides that “emotional distress shall not be treated as

a physical injury or physical sickness” for purposes of section

104(a)(2) (except for damages not in excess of the amount paid

for medical care attributable to emotional distress).   According

to the legislative history of section 104(a)(2), “[T]he term

emotional distress includes symptoms (e.g., insomnia, headaches,

stomach disorders) which may result from such emotional

distress.”   H. Conf. Rept. 104-737, at 301 n.56 (1996), 1996-3

C.B. 741, 1041 n.56.

     Generally, damages are excludable from gross income if they

satisfy two requirements.10   The Supreme Court in Commissioner v.



     9
        The Small Business Job Protection Act of 1996, Pub. L.
104-188, sec. 1605, 110 Stat. 1838 (1996 amendment), amended sec.
104(a)(2) to narrow the exclusion for personal injury damages
received pursuant to a judgment or settlement, effective for
amounts received after Aug. 20, 1996. Under the 1996 amendment,
personal injury or sickness must be physical in nature.
Moreover, the amendment explicitly excepts punitive damages from
the exclusion provided by sec. 104(a)(2).
     10
        Under the 1996 amendment, which does not otherwise
change the sec. 104(a)(2) analysis set forth in Commissioner v.
Schleier, 515 U.S. 323, 336-337 (1995), the personal injury or
sickness must be physical in nature to exclude damages from gross
income.
                                - 11 -

Schleier, 515 U.S. 323, 336 (1995), established those

requirements as:

     First, the taxpayer must demonstrate that the
     underlying cause of action giving rise to the recovery
     is “based upon tort or tort type rights”; and second,
     the taxpayer must show that the damages were received
     “on account of personal injuries or sickness.”

Under the 1996 amendment, the personal injury or sickness for

which the damages are received must be physical in nature.

     In the present case, Mrs. Prasil received the $7,650

settlement payment pursuant to a settlement agreement with

Heartland.    When damages 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, supra at 237.   The

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), and cases cited

therein.     If the settlement agreement lacks express language

stating what the settlement amount was paid to settle, we look to

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

613 (10th Cir. 1965), affg. T.C. Memo. 1964-33 (citing Agar v.

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

T.C. Memo. 1960-21), based on all the facts and circumstances of

the case, including the complaint filed and details surrounding
                              - 12 -

the litigation.   Robinson v. Commissioner, supra at 127.    If a

settlement is attributable to claims based on tort or tort type

rights as well as other rights, it may be necessary to determine

which portion of the settlement is attributable to damages

received based on tort or tort type rights.   Similarly, it may be

necessary to determine which portion, if any, of the settlement

may be attributable to damages received for personal physical

injuries or physical sickness.

     In the instant case, we address first the question of

whether the $7,650 settlement payment was received on account of

a personal physical injury or physical sickness, if any.    That is

because a resolution of this question in respondent’s favor

controls the disposition of the issue before us.

     Petitioners would have this Court conclude that Heartland

paid the $7,650 settlement payment to Mrs. Prasil because she

suffered a “physical sickness”; i.e., she got very ill and her

Sweet’s syndrome worsened as a result of “the abuse that she took

from this man [Mr. Lakner] down at work” such that she had to be

hospitalized and could not walk.   However, Mrs. Prasil admitted

that she suffered from a preexisting medical condition prior to

employment with Heartland, and there is no comparative evidence

of the nature of her condition before, during, or after

employment with Heartland to determine the nature of Mrs.

Prasil’s sickness, let alone the cause of her sickness.     In fact,
                               - 13 -

Mrs. Prasil testified that “They [the doctors] thought I had

leukemia, too.   And that’s what was causing the Sweet’s

syndrome.”   Further, Mrs. Prasil’s testimony appears to describe

manifestations of a stress-induced illness; i.e., rash and fever,

where “things that would happen to me [Mrs. Prasil] made me much

worse”.   Other than petitioners’ own self-serving testimony, the

record is devoid of any evidence that Heartland’s sex

discrimination caused a physical injury to or the physical

sickness of Mrs. Prasil.   We are not required to, and do not,

accept petitioners’ self-serving testimony without corroborating

evidence.    Lerch v. Commissioner, 877 F.2d 624, 631-632 (7th Cir.

1989), affg. T.C. Memo. 1987-295; Geiger v. Commissioner, 440

F.2d 688, 689-690 (9th Cir. 1971), affg. per curiam T.C. Memo.

1969-159; Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).

Although we sympathize with Mrs. Prasil’s medical condition, the

uncorroborated evidence in the record does not support a

conclusion that her maladies constitute a physical injury or a

physical sickness caused by the conduct of Heartland or of Mr.

Lakner.

     Even assuming arguendo that Mrs. Prasil suffered a personal

physical injury or physical sickness, the record does not support

the conclusion that Mrs. Prasil received the $7,650 settlement

payment on account of such physical injury or physical sickness.

Pursuant to the settlement agreement, Mrs. Prasil released “any
                              - 14 -

and all claims”, including claims based on sex discrimination,

against Heartland in exchange for $7,650.    However, the

settlement agreement did not specifically carve out any portion

of the settlement payment as a settlement on account of personal

physical injury or physical sickness, let alone make reference to

a physical injury or a physical sickness, if any, resulting from

any sex discrimination by Heartland.    Because the settlement

agreement did not allocate any part of the settlement payment on

account of a personal physical injury or physical sickness, and

there is no evidence in the record to support such an allocation,

we are not in a position to conclude that any part of the

settlement payment was on account of physical injury or physical

sickness.   In sum, we are unable to find that any portion of the

$7,650 settlement payment was intended to compensate Mrs. Prasil

for a personal physical injury or physical sickness.

     In view of the foregoing, we hold that the $7,650 settlement

payment that Mrs. Prasil received in 1999 in settlement of a sex

discrimination claim against her former employer is includable in

petitioners’ gross income for 1999.    Accordingly, we sustain

respondent’s determination in this regard.

     We have considered all of the other arguments made by

petitioners and, to the extent that we have not specifically

addressed them, we conclude they are without merit.
                             - 15 -

     To reflect our disposition of the disputed issue, as well as

the parties’ concessions,



                                   Decision will be entered

                              under Rule 155.
