NIELD v. COMMISSIONER

CHIECHI, Judge: This case was heard pursuant to section 7463 of the Internal Revenue Code in effect at the time the petition was filed. ¹ 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 in petitioners' Federal income tax (tax) for 1998 in the amount of $ 4,763.

The issue for decision is whether the $ 29,000 settlement amount (settlement amount at issue) that petitioner Naylene M. Nield (Ms. Nield) received in 1998 in settlement of a claim against her employer is excludable from petitioners' gross income under section 104(a)(2). *113 We hold that it is not.

             Background

[4] Most of the facts have been stipulated and are so found.

Petitioners resided in Cedar City, Utah, at the time they filed the petition in this case.

On September 5, 1989, Ms. Nield began working for Goer Manufacturing, Inc. (Goer). On or about July 9, 1992, Goer terminated her employment.

On December 31, 1992, Ms. Nield filed a claim (State claim) against Goer with the State of Utah Industrial Commission, Anti-Discrimination Division (Utah Industrial Commission) consisting of two affidavits by Ms. Nield (Ms. Nield's affidavits) in which she alleged employment discrimination, sexual harassment, and retaliation. ² One of Ms. Nield's affidavits alleged that "when * * * [Ms. Nield's supervisor] would walk past me he would lift up his elbow and bump into my breast."

*114 On or about October 4, 1996, Ms. Nield received a "Notice of Right to Sue" from the Phoenix District Office of the EEOC.

In December 1996, Ms. Nield filed a complaint (complaint) against Goer in the United States District Court for the Southern District of Utah (United States District Court). In that complaint, Ms. Nield alleged both a claim for sexual harassment under "Title VII of the Act of Congress known as 'The Civil Rights Act of 1964' (42 U.S.C. 2000e) et seq.)", and a State law claim for wrongful termination "in violation of Title [sic] 35- 911, Utah Code Annotated."

Ms. Nield's complaint alleged in pertinent part:

     11. During and throughout the period of Plaintiff's

   employment with Defendant [Goer], and culminating with the

   Defendants [sic] termination of the Plaintiff, the Plaintiff was

   subject to sexual harassment in violation of Section 704, Title

   VII (42 U.S.C. 2000e3), to wit:

        a. The Defendant, Goer Manufacturing Company subjected

     her to a hostile and sexually demeaning work environment

     due to repeated acts*115 of sexual harassment by her supervisor

     * * * by subjecting the Plaintiff to such things as:

          i. comments about her anatomy;

          ii. degrading sexual remarks;

          iii. pressure to date and give sexual favors to a

        co-worker in return for money;

          iv. having sexually explicit calendars and

        cartoons in the workplace; and

          v. other acts and omissions of and causing sexual

        harassment.

        b. Defendant, acted in a discriminatory manner towards

     her because Defendant retaliated against her by terminating

     her employment because she complained to management about

     the alleged sexual harassment, to wit:

          i. the supervisor about whom she complained had

        threatened to "get even" with her if she ever

        reported him to management again

          ii. Plaintiff s [sic] supervisor was instrumental

*116         in the decision to terminate her

          iii. and was retaliating against her because she

        had reported his acts of sexual harassment to

        management.

     12. As a further result of the Defendant's abovestated

   actions, the Plaintiff has been and is being deprived of income

   in the form of wages and of prospective retirement benefits,

   social security and other benefits due to her as a worker solely

   because of her sex in the sum to be proven at the trial.

           *   *   *   *   *   *   *

     14. Plaintiff invokes this court's jurisdiction * * * [to]

   adjudicate claims arising out of the transactions set forth

   above that violate rights and duties established by the law of

   Utah, to wit:

        a. That the Plaintiff s [sic] termination was wrongful

     in that it violates of [sic] the public policy set forth in

42 U.S.C.  2000e.

        b. That the Plaintiff s [sic] termination was in

     violation*117 of Title 35-9-11, Utah Code Annotated.

     15. The treatment of Plaintiff by Defendant and by

   Supervisor were [sic] intentional and with the purpose and

   intent of causing Plaintiff severe and grievous mental and

   emotional harm which in turn resulted in severe physical

   consequences in violation of the common law of Utah.

PRAYER FOR RELIEF

     WHEREFORE, Plaintiff respectfully prays this Court to:

     1. Grant Plaintiff a preliminary injunction requiring the

   Defendant to reinstate plaintiff as an employee * * * and

   enjoining defendant * * * from terminating Plaintiff and from

   harassing her or from retaliating against her and the class she

   represents for asserting their rights under Title VII;

     2. Grant Plaintiff a permanent injunction enjoining the

   Defendant Company * * * from engaging in any employment policy

   or practice which discriminates against any employee or member

   or applicant for employment on the basis of sex;

     3. Order defendant to make whole the Plaintiff*118 herein by

   providing appropriate back pay and reimbursement for lost sick

   leave pay, health and disability insurance benefits, pension,

   social security and other benefits in an amount to be shown at

   trial, and other affirmative relief including, but not limited

   to, an affirmative action program designed to eliminate the

   effects of the discriminatory practices complained of herein;

           *   *   *   *   *   *   *

     6. Plaintiff prays for an award of actual damages to

   compensate plaintiff for the humiliation and associated personal

   suffering caused by Defendant's unlawful treatment in the amount

   to be proven at the time of trial of this matter but in an

   amount not less than $ 100,000.00.

     7. Plaintiff prays for an award of punitive damages in an

   amount believed by the court to be appropriate to punish

   Defendant for the willful and malicious misconduct and necessary

   to deter Defendant from engaging in such misconduct in the

   future;

[11] On January 19, 1998, Goer's attorney conducted a deposition (deposition)*119 of Ms. Nield with respect to her complaint. Ms. Nield testified during her deposition that

     There was another occasion where there was a bunch of -- in

   my area it was -- I was in the light department of Spartan

   Showcase, and in my area we had our work tables, and then right

   behind us we had bins -- well, they weren't really bins but they

   were wood things that had the sheets for the lights in it. And

   there was not very much room between there because we had a

   bunch of stuff stacked in there, and he had brushed by me and

   did this type of thing into my breast (indicating).

In connection with Ms. Nield's foregoing testimony during her deposition, Goer's attorney asked her the following questions, to which she gave the following answers:

     Q Talking about elbowing?

     A Bumped his elbow right into my breast. And I told her

   about that.

     Q What else did you tell her?

     A The way he talked, the way he swore. I told her

   everything that I have told you.

     Q So you told her about how he broke things?

  *120    A Yes.

     Q Told her about how he would scream and abuse everybody?

     A Yes, and the derogatory statements, harassing women. I

   told her everything.

     Q What did she say after you told her all that?

     A She said, okay, thank you, and continued her --

     Q You mentioned something about the elbow in the breast.

   When did that happen and what happened?

     A He just had -- he was joking with somebody over down

   farther from me, and I don't know what was going on. I could

   just hear everybody laughing. * * * [the supervisor] was there,

   * * * [coworker 1] was there, and I don't know who else was

   there. But I could hear * * * [the supervisor] and * * *

   [coworker 1] laughing, because they did it all the time.

     And then he came through, there wasn't room to get through

   so he was pushing his way through and then started laughing and

   just kept going.

     Q So you were standing --

     A I was standing there working at my table.

     Q At your*121 table. And he was walking behind you?

     A Well, he -- he kind of had to zigzag through all the

   stuff that was stacked right there, and * * * [coworker 2] was

   there too because she worked and helped me there. And he had --

   there was more room in between her and him or her and the stuff,

   and so he just walked normal past her. But to get around me I

   had to turn sideways and kind of move out of the way, and when

   he did -- or when I turned he did that.

     Q Do you believe he did that on purpose?

     A Well, he was laughing about it. So yes, I did.

     Q And because he was laughing you felt he did that on

   purpose?

     A Yes.

     Q In your mind is it just as possible that he did it by

   accident and then at that point thought it was amusing?

     A No, because if he had done it on accident he wouldn't

   have even realized he did it. He would have just kept going and

   doing his --

     Q So what did you say to him?

     A I just said -- I just made a -- I didn't really say

*122    anything. I just was disgusted.

     Q When did that happen?

     A That was probably somewhere in between '90 and '91. That

   never happened again after that.

     Q Anything else that he said or did, that * * * [the

   supervisor] said or did that you thought was sexually harassing

   other than everything we've talked about so far?

     A Well, there's nothing that stands out in my mind.

[12] On March 20, 1998, Ms. Nield and Goer executed a document entitled "SETTLEMENT AGREEMENT AND GENERAL RELEASE" (settlement agreement). The settlement agreement provided in pertinent part:

     1. Payment Terms. The Company [Goer] shall pay Nield

   and her attorneys the amounts set forth below within fourteen

   (14) days after receipt by the Company's counsel of an original

   of this Settlement Agreement and General Release executed and

   dated by Nield.

[13] The payment shall be made in the following manner:

     a. The Company will pay and cause to be delivered to

   Nield's attorney, David T. Berry a check made payable to Naylene

   Nield*123 in the gross amount of Three Thousand Dollars and No/100

   ($ 3,000.00), less required payroll deductions. An IRS Form W-2

   will be issued to Nield by the Company.

     b. In addition to the foregoing payment, the Company will

   pay Nield the sum of Twenty-nine Thousand Dollars and No/100

   ($ 29,000.00) as non-wage consideration for general compensatory

   damages for pain and suffering incurred by Nield relating to her

   claims of intentional discrimination and alleged sexually

   hostile working environment experienced by Nield while working

   at Goer. This amount will be paid by separate check made payable

   to Nield, and the Company will issue an IRS Form 1099 reflecting

   this amount.

           *   *   *   *   *   *   *

   2. Mutual Release and Covenant Not To Sue.

     a. * * * Nield, hereby fully, finally and unconditionally

   releases and forever discharges Goer from and for any and all

   claims, liabilities, suits, discrimination or other charges,

   personal injuries, demands, debts, liens, damages, costs,

   grievances, *124 injuries, actions or rights of action of any nature

   whatsoever, known or unknown, liquidated or unliquidated,

   absolute or contingent, in law or in equity, which could have

   been filed with any federal, state, local or private court,

   agency, arbitrator or any other entity, based directly or

   indirectly upon Nield's employment with Goer * * *.

[14] On March 26, 1998, Goer issued to Ms. Nield a check in the amount of $ 2,644.50, which represented the $ 3,000 in wages, less required payroll deductions, to which Ms. Nield was entitled under paragraph 1. a. of the settlement agreement. Pursuant to the settlement agreement, Goer issued to Ms. Nield Form W-2, Wage and Tax Statement, for 1998 showing the $ 3,000 in wages and the payroll deductions.

On March 27, 1998, Goer issued to Ms. Nield a check in the amount of $ 29,000, which represented the $ 29,000 in "non-wage consideration for general compensatory damages for pain and suffering" to which Ms. Nield was entitled under paragraph 1. b. of the settlement agreement. Pursuant to the settlement agreement, Goer issued to Ms. Nield Form 1099-MISC, Miscellaneous Income (Form 1099), for 1998 showing*125 "Other income" of $ 29,000.

Petitioners filed a tax return (return) for their taxable year 1998. In that return, petitioners included in gross income the $ 3,000 in wages, and excluded from gross income the $ 29,000 settlement amount at issue, that Ms. Nield received from Goer.

On June 26, 2001, respondent issued to petitioners a notice of deficiency (notice) for 1998. In that notice, respondent determined that petitioners are not allowed to exclude from gross income the settlement amount at issue that Ms. Nield received from Goer.

               Discussion

[18] We must determine whether the settlement amount at issue is excludable from petitioners' gross income for 1998. ³

Section 61(a) provides the following sweeping definition of the term "gross income": "Except as otherwise provided in this subtitle, gross income means all income from whatever source derived". Not only*126 is section 61(a) broad in its scope, Commissioner v. Schleier, 515 U.S. 323, 328, 132 L. Ed. 2d 294, 115 S. Ct. 2159 (1995), exclusions from gross income must be narrowly construed, id.; United States v. Burke, 504 U.S. 229, 248, 119 L. Ed. 2d 34, 112 S. Ct. 1867 (1992).

Section 104(a)(2) on which petitioners rely provides that gross income does not include

        (2) 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;

           *   *   *   *   *   *   *

   For purposes of paragraph (2) [of section 104(a)], emotional

   distress shall not be treated as a physical injury or physical

   sickness. * * *

[21] The regulations under section 104(a)(2) restate the statutory language of that section and further provide:

   The term "damages received (whether by suit or

   agreement)" means an amount received (other than workmen's

   compensation) through prosecution of a legal suit or action

   based upon tort or tort type rights, or*127 through a settlement

   agreement entered into in lieu of such prosecution. [Sec. 1.104-

   1(c), Income Tax Regs.]

[22] The Supreme Court summarized the requirements of section 104(a)(2) as follows:

     In sum, the plain language of  104(a)(2), the text of



   the applicable regulation, and our decision in Burke establish



   two independent requirements that a taxpayer must meet before a



   recovery may be excluded under  104(a)(2). 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." * * * [Commissioner v. Schleier, supra at

   336-337.]

[23] When the Supreme Court issued its opinion in Commissioner v. Schleier, supra, section 104(a)(2), as in effect for the year at issue in Schleier, required, inter alia, that, in order to be excluded from gross income, an amount of damages had to be received "on account of personal injuries or sickness." After the Supreme*128 Court issued its opinion in Schleier, Congress amended (1996 amendment) section 104(a)(2), effective for amounts received after August 20, 1996, by adding the requirement that, in order to be excluded from gross income, any amounts received must be on account of personal injuries that are physical or sickness that is physical. Small Business Job Protection Act of 1996, Pub. L. 104-188, sec. 1605, 110 Stat. 1755, 1838-1839. The 1996 amendment does not otherwise change the requirements of section 104(a)(2) or the analysis set forth in Commissioner v. Schleier, supra; it merely imposes an additional requirement for an amount to qualify for exclusion from gross income under that section.

Each of the two independent requirements described in Commissioner v. Schleier, supra, that a taxpayer must satisfy in order to qualify an amount for exclusion from gross income under section 104(a)(2) involves two inquiries that are similar. In the instant case, the dual inquiries under the first requirement are whether Ms. Nield's underlying claims were based on tort or tort type rights and, if they were, whether such claims gave rise to the payment by Goer of the settlement*129 amount at issue. The dual inquiries under the second requirement are whether Ms. Nield's alleged injuries were personal and physical in nature and, if so, whether the settlement amount at issue was received on account of such personal physical injuries.

Respondent contends that the claims set forth in the complaint that Ms. Nield filed in the United States District Court were not based on tort or tort type rights and that Ms. Nield did not receive the settlement amount at issue on account of personal physical injuries or physical sickness. Petitioners disagree.

We turn to the parties' dispute regarding whether the settlement amount at issue was received on account of personal physical injuries or physical sickness. That is because our findings and conclusions with respect to that dispute resolve the issue presented to us under section 104(a)(2).

Where damages are received pursuant to a settlement agreement, such as is the case here, 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, supra at 237. The determination of the nature of the claim is factual. Robinson v. Commissioner, 102 T.C. 116, 126 (1994),*130 affd. in part, revd. in part, and remanded on another issue 70 F.3d 34 (5th Cir. 1995); Seay v. Commissioner, 58 T.C. 32, 37 (1972). Where there is a settlement agreement, that determination is usually made by reference to it. SeeKnuckles v. Commissioner, 349 F.2d 610, 613 (10th Cir. 1965), affg. T.C. Memo 1964-33; Robinson v. Commissioner, supra.If the settlement agreement lacks express language stating what the settlement amount was paid to settle, the intent of the payor is critical to that determination. Knuckles v. Commissioner, supra; 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; Fono v. Commissioner, 79 T.C. 680, 696 (1982), affd. without published opinion 749 F.2d 37 (9th Cir. 1984).

In support of her position that she received the settlement amount at issue on account of*131 personal physical injuries, Ms. Nield relies on: (1) Her testimony, (2) the settlement agreement, (3) her deposition taken in connection with the complaint filed in the United States District Court, and (4) Ms. Nield's affidavits that comprised her State claim with the Utah Industrial Commission.

With respect to Ms. Nield's self-serving testimony regarding her contention that she received the settlement amount at issue on account of personal physical injuries, we find that testimony to be questionable in certain material respects. Moreover, Ms. Nield called no witnesses, such as the attorney who represented her with respect to her claims against Goer, in order to corroborate her testimony. Under the circumstances, we are not required to, and we shall not, rely on Ms. Nield's testimony regarding her position that Goer paid her the $ 29,000 at issue on account of her personal physical injuries. 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).*132

An example of Ms. Nield's testimony that we find to be questionable is her testimony that her supervisor at Goer (supervisor) bumped "into * * * [her] breast with his elbow" (alleged elbowing incident) and that that alleged elbowing incident caused her bruising. ⁴ Except for Ms. Nield's testimony at the trial in the instant case, the record before us, including her State claim, her complaint, and her deposition, shows that Ms. Nield did not make any claims that she suffered bruising or other physical injury as a result of her supervisor's having bumped into her breast with his elbow. Moreover, Ms. Nield admitted at trial, and the instant record establishes, that she did not seek medical treatment for the alleged bruising from the alleged elbowing incident, which she claimed for the first time during her testimony in this case. ⁵

*133 Another example of Ms. Nield's testimony that we find to be questionable is her testimony that her supervisor once tackled her in the parking lot at work (alleged tackling incident). ⁶ Ms. Nield did not mention any such alleged incident in her State claim, her complaint, or her deposition. That was because, according to Ms. Nield, she was afraid of her supervisor, and she did not mention the alleged tackling incident until an alleged arbitration of her claims against Goer, which she contends took place after her deposition, when Ms. Nield asserts her supervisor was in jail, and which she contends led to the settlement agreement. Ms. Nield's explanation about why she did not mention the alleged tackling incident in her State claim, her complaint, or her deposition is belied by the fact that Ms. Nield showed no fear of her supervisor in advancing her various claims against him and Goer in her State claim, her complaint, and her deposition.

*134 A further illustration of Ms. Nield's testimony that we find to be questionable is her testimony that her complaint, which she testified her attorney drafted on the basis of written information that she provided to him, did not allege any personal physical injuries because she did not have the opportunity to review the complaint before it was filed. We find Ms. Nield's explanation to be incredible. We do not believe that if Ms. Nield had communicated to her attorney that she suffered personal physical injuries related to her employment, her attorney would have failed to allege any such injuries in the complaint, especially since Ms. Nield's attorney filed the complaint on her behalf in December 1996 after Congress amended section 104(a)(2) to require that any amounts received after August 20, 1996, be received on account of personal physical injuries or physical sickness in order to be excludable from gross income. See Small Business Job Protection Act of 1996, Pub. L. 104-188, sec. 1605, 110 Stat. 1755, 1838-1839. ⁷

*135 Another example of Ms. Nield's testimony that we find to be questionable is her testimony that her attorney advised her that the tax law did not require her to include the settlement amount at issue in gross income. That testimony is belied by the settlement agreement which required Goer to issue Form 1099 to Ms. Nield reflecting the $ 29,000 settlement amount at issue.

With respect to the settlement agreement on which Ms. Nield relies to support her position in this case, we have reviewed that agreement and find that it does not support Ms. Nield's contention that she received the settlement amount at issue on account of personal physical injuries. The settlement agreement supports a contrary finding. Nowhere in the settlement agreement were there any references to the alleged elbowing incident and the alleged tackling incident that Ms. Nield contends caused her physical injuries for which Goer compensated her by paying her the settlement amount at issue. ⁸ Moreover, as discussed above, the settlement agreement required Goer to issue Form 1099 to Ms. Nield showing the settlement amount at issue as "Other income" for 1998, thereby reflecting the intention of Goer as well as Ms. Nield, *136 the parties to the settlement agreement, that Ms. Nield was to report the settlement amount at issue as income for that year.

With respect to Ms. Nield's deposition on which she relies, we have reviewed that deposition and find that it does not support Ms. Nield's position that she received the settlement amount at issue on account of personal physical injuries. The deposition supports a contrary finding. Although Ms. Nield raised the alleged elbowing incident in her deposition, nowhere in the deposition did she allege that she suffered any physical injuries as a result of that incident. ⁹

*137 With respect to Ms. Nield's affidavits that comprise her State claim with the Utah Industrial Commission on which she relies, we have reviewed those affidavits and find that they do not support her position that she received the settlement amount at issue on account of personal physical injuries. Ms. Nield's affidavits support a contrary finding. Although Ms. Nield raised the alleged elbowing incident in her State claim, nowhere in the affidavits did she allege that she suffered any physical injuries as a result of that incident. ¹⁰

*138 Based upon our examination of the entire record before us, we find that Ms. Nield's claims against Goer did not include any claims for personal physical injuries. On that record, we further find that Ms. Nield did not receive the settlement amount at issue on account of personal physical injuries. On the instant record, we find that petitioners are not entitled to exclude from gross income under section 104(a)(2) the settlement amount at issue that Ms. Nield received from Goer.

We have considered all of the contentions and arguments of the parties that are not discussed herein, and we find them to be without merit, irrelevant, and/or moot.

To reflect the foregoing,

Decision will be entered for respondent.