                        T.C. Memo. 2005-251



                      UNITED STATES TAX COURT



                   BARBARA BOND, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14223-04.             Filed October 31, 2005.



     Barbara Bond, pro se.

     Robert W. Dillard, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   Respondent determined a deficiency in

petitioner’s income tax of $5,527 for 2002 and an accuracy-

related penalty under section 6662(a) of $1,105.
                                - 2 -

     After a concession by respondent,1 the issue for decision is

whether petitioner may exclude from income under section

104(a)(2) $25,000 that she received in 2002 in settlement of a

lawsuit.   We hold that she may not.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

A.   Petitioner

     Petitioner lived in Florida when she filed the petition.

She was formerly employed in Indiana by Ivy Tech College (Ivy

Tech).

B.   Petitioner’s Claims Against Ivy Tech

     In 2001, petitioner filed employment discrimination charges

with the Equal Employment Opportunity Commission (EEOC) against

Ivy Tech and sued Ivy Tech in the U.S. District Court for the

Northern District of Indiana.   Petitioner alleged in her lawsuit

that she had been damaged by unlawful acts or practices by Ivy

Tech arising from her employment with Ivy Tech and sought damages

and other relief.

C.   Petitioner’s Illness and Injuries

     In 2002, petitioner’s doctors diagnosed carpal tunnel

syndrome and ordered her not to use her right hand.   Petitioner


     1
        Respondent conceded at trial that petitioner is not
liable for the accuracy-related penalty under sec. 6662(a).
Unless otherwise indicated, section references are to the
Internal Revenue Code as amended and in effect during 2002. Rule
references are to the Tax Court Rules of Practice and Procedure.
                                   - 3 -

told the EEOC that Ivy Tech required her to do filing despite her

doctors’ orders.   On a date not stated in the record, petitioner

had surgery to correct her carpal tunnel syndrome.           Shortly after

petitioner returned to work, she tripped over some boxes at her

workplace, fell, and injured her back.         She received physical

therapy for the injury.       Petitioner made worker’s compensation

claims for her carpal tunnel and back injuries.            Petitioner was

hospitalized for 2 to 3 weeks for depression in March 2002.

D.   Settlement of Petitioner’s Claims and Tax Treatment of It

     Petitioner signed a document entitled Settlement Agreement

and Release on March 21, 2002, which included the following:

          In consideration of the release and all of the
     promises and representations made by Bond in this
     Agreement, the College will allow Bond to resign,
     effective March 20, 2002 and pay to Bond the total sum
     of [$25,000]. The College will issue an IRS Form 1099
     to Bond reflecting the payment set forth above in this
     paragraph 1.

           *       *      *       *        *    *      *

     The parties further agree that the College * * * will
     not authorize any of its representatives or legal
     agents to discuss this Agreement or the circumstances
     surrounding its making with anyone outside the College,
     unless required to do so by law, nor will The College
     authorize any of its representatives or legal agents to
     make any disparaging remarks or comments to any other
     person and/or entity about Bond.

     In the settlement agreement, petitioner released Ivy Tech

from all claims except her pending claims under the Indiana

worker’s compensation law, for claims due to injuries which

occurred before the date of the agreement.          The settlement
                                 - 4 -

agreement stated that the parties entered into it solely to avoid

the burden and expense of litigation.

     Ivy Tech paid $25,000 to petitioner in 2002 pursuant to the

settlement agreement.   Petitioner paid $8,332 of that amount as

attorney’s fees she had incurred in obtaining the recovery.

Respondent received a Form 1099-MISC, Miscellaneous Income, from

Ivy Tech showing that it had paid $25,000 to petitioner in 2002.

Petitioner received a Form W-2, Wage and Tax Statement, for 2002,

but did not receive a Form 1099.    She did not report the $25,000

payment as income on her 2002 Federal income tax return.

                              OPINION

A.   Contentions of the Parties and Background

     Petitioner contends that $25,000 that she received from Ivy

Tech in 2002 in settlement of a lawsuit is excluded from income

because (1) section 104(a)(2) so provides, and (2) Ivy Tech

breached the settlement agreement.2

     Gross income generally does not include damages received

(whether by suit or agreement) on account of personal physical

injuries or physical sickness.    Sec. 104(a)(2).   For petitioner

to exclude the $25,000 payment under section 104(a)(2), she must

show that the damages were received on account of personal


     2
        Respondent’s determination is presumed correct and
petitioner bears the burden of proof on all issues in this case.
See Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Petitioner does not contend that respondent bears the burden of
proof under sec. 7491(a).
                                 - 5 -

physical injuries or physical sickness.     Id.   To decide the

purpose or purposes for which a payment was made, courts have

considered, inter alia, the following:     (1) The underlying

complaint and the nature of the claims; (2) the settlement

negotiations and settlement agreement; and (3) the intent of the

payor.     See United States v. Burke, 504 U.S. 229, 237-239 (1992);

Thompson v. Commissioner, 866 F.2d 709, 711 (4th Cir. 1989),

affg. 89 T.C. 632 (1987); Knuckles v. Commissioner, 349 F.2d 610,

612-613 (10th Cir. 1965), affg. T.C. Memo. 1964-33; Agar v.

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

T.C. Memo. 1960-21; Bagley v. Commissioner, 105 T.C. 396, 406

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

B.   Whether the $25,000 Is Excluded From Income Under Section
     104(a)(2)

     1.      Petitioner’s Carpal Tunnel and Back Injuries

     Petitioner’s carpal tunnel syndrome was diagnosed in 2002,

and she suffered back injuries in 2002 while working for Ivy

Tech.     Petitioner made worker’s compensation claims for those

injuries.     The settlement agreement specifically excludes all

claims that petitioner had pending under the Indiana Worker’s

Compensation Act for injuries which occurred before the date of

the agreement.     Thus, we conclude that the $25,000 settlement

payment was not intended to compensate petitioner for her carpal

tunnel and back injuries.
                                 - 6 -

     2.   Petitioner’s Emotional Distress

     Petitioner was hospitalized for depression and emotional

distress in March 2002, which she testified were caused by Ivy

Tech’s conduct.   Petitioner contends that an unspecified amount

of the $25,000 payment was intended to compensate her for

depression and emotional distress and is excludable under section

104(a)(2).   We disagree.

     Damages attributable to emotional distress are excludable

from income under section 104(a)(2) up to the amount paid for

medical care described in section 213(d)(1)(A) and (B).   Sec.

104(a) (flush language).3   The record does not contain any

information relating to the amount of petitioner’s

hospitalization expenses for depression or any related medical

expenses, and so we have no basis on which to allocate any part

of the $25,000 to those costs.



     3
        Sec. 104(a)(2) was amended in 1996 by the Small Business
Job Protection Act of 1996 (SBJPA), Pub. L. 104-188, sec.
1605(a), 110 Stat. 1838, effective generally for amounts received
after Aug. 20, 1996. In relevant part, the amendment added the
modifier “physical” after “personal” and before “injuries” and
the modifier “physical” was added before “sickness”. The
amendment also provides that emotional distress shall not be
treated as a physical injury or physical sickness except to the
extent of damages not in excess of the amount paid for medical
care described in sec. 213(d)(1)(A) and (B) attributable to
emotional distress. Sec. 104(a) (flush language). The
legislative history accompanying enactment of the SBJPA states
that “the 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.
                                 - 7 -

     3.   Conduct of Ivy Tech

     Petitioner contends that she was not required to include the

$25,000 payment in income because Ivy Tech violated the

settlement agreement by (1) disclosing its terms to others or by

making disparaging remarks about her and (2) failing to send a

Form 1099 to her.   We disagree.   Ivy Tech’s conduct after paying

the $25,000 settlement to petitioner is not relevant to whether

she must include the $25,000 in income, and her nonreceipt of a

Form 1099 required by the settlement agreement to be sent to her

does not convert a taxable item to a nontaxable item.   See Vaughn

v. Commissioner, T.C. Memo. 1992-317, affd. without published

opinion 15 F.3d 1095 (9th Cir. 1993).

     4.   Conclusion

     We conclude that the $25,000 that petitioner received from

Ivy Tech in 2002 was not paid on account of personal physical

injuries or physical sickness and is thus not excluded from

income under section 104(a)(2).4

     To reflect the foregoing,

                                               Decision will be

                                          entered under Rule 155.



     4
        In the Rule 155 computation, the parties should consider
whether petitioner is entitled to an itemized deduction for the
$8,332 in attorney’s fees that she incurred in connection with
the settlement. See Commissioner v. Banks, 543 U.S. __, __, 125
S. Ct. 826, 830 (2005).
