Anderson v. Commissioner, Docket No. 7586-77.

• Decision Date: 13 August 1979
• Docket Number: Docket No. 7586-77.
• Citation: 1979 TC Memo 309,38 TCM (CCH) 1206
• Parties: Vernon L. and Elna S. Anderson v. Commissioner.
• Court: U.S. Tax Court

38 TCM (CCH) 1206

1979 TC Memo 309

T.C. Memo. 1979-309.

Vernon L. and Elna S. Anderson v. Commissioner.

Docket No. 7586-77.

United States Tax Court.

Filed August 13, 1979.

Vernon L. Anderson, pro se, 11220 Moorpark St., North Hollywood, Calif. John O. Kent, for the respondent.

Memorandum Findings of Fact and Opinion

DRENNEN, Judge:

Respondent determined a deficiency of $5,983 in petitioners' income tax for the taxable year 1974. The only issue presented in this case is whether the payment of $22,200 to Vernon L. Anderson by Southern Illinois University in 1974 is includable in gross income under section 61, I.R.C. 1954,¹ or is excludable from gross income under section 104.

Findings of Fact

Some of the facts have been stipulated and are so found. The stipulation of facts together with the attached exhibits are incorporated herein by reference.

Vernon L. Anderson and Elna S. Anderson, petitioners² herein, resided in North Hollywood, Calif., at the time they filed their petition in this case. They filed a joint income tax return for the taxable year 1974.

Attached to and filed with the 1974 return was the following statement:

During the year ended December 31, 1974 taxpayer Vernon L. Anderson received settlement from Southern Illinois University, Carbondale, Illinois, in the amount of $22,000 sic for professional defamation, and damage to professional reputation. Due to the nature of the amounts received, taxpayer has excluded settlement from taxable income.

The actual amount received was $22,200.

From 1968 until June 30, 1974, petitioner was employed as an associate professor of foreign languages specializing in German and Spanish by Southern Illinois University at Carbondale (hereinafter SIUC). Petitioner's employment contract provided tenured status which meant that the duration of the contract was indefinite assuming continued competent performance of his duties and acceptable personal behavior.

On December 4, 1973, the Illinois Board of Higher Education adopted a budget which reduced the operating budget of SIUC for the fiscal year 1975 (July 1 through June 30) by approximately $2,700,000. The Illinois Board of Higher Education gave the following reasons for reduction:

(a) The decrease in enrollment and the projection for further decreases;

(b) The unfavorable teacher-student ration in terms of numbers of teachers to number of students; and

(c) A higher than average cost of instruction per student factor and a lower credit hour production of some departments within the instructional units.

As a result of the action taken by the Illinois Board of Higher Education, SIUC determined that the University would be required to cut back on some programs and to terminate some employees, including employees who had term, continuing, tenured, and nontenured appointments in order to operate within the reduced budget for the 1975 fiscal year. Consequently, during December 1973, SIUC sent notices of termination effective June 30, 1974, to 104 persons including petitioner. The names of these persons were not made public by SIUC.³ The terminations were not based on incompetence, moral turpitude, or personal considerations and those terminated were informed by SIUC that it would assist them in finding other employment.

After receiving the notice of termination, Dr. Anderson met with J.K. Leasure, a vice president of SIUC, to discuss settlement at Mr. Leasure's request. Dr. Anderson specifically broached the question of tenure at this meeting and had raised the problem earlier. SIUC's stated purpose in proposing and negotiating settlements with the terminated employees was explained as settlement of any and all claims of whatever nature including action for defamation and loss of reputation against SIUC. Each person terminated would be paid an amount equivalent to 1 additional year's salary. The negotiations could then consider such matters as sabbatical leave, accumulated sick and vacation time, pending retirement considerations, past salary inequities, and other affirmative action considerations. Thereafter each settlement was negotiated individually. SIUC did not consider the settlement payments to be salary or wages. An agreement of settlement was conditioned upon execution by the terminated employee of a general, all inclusive release. SIUC proposed paying Dr. Anderson 1 year's salary or $22,500.

On June 13, 1974, Leasure sent a memorandum which had been signed by Dr. Anderson to John Huffman, then chief counsel for SIUC stating:

Vernon L. Anderson has indicated to me that he wishes to make a settlement of the disputed claim involving his termination. He has stated to me that he is not represented by an attorney and that he has signed nothing to authorize anything for an attorney to represent him; that he is free to negotiate directly with the University. He has further advised me of this to induce me to deal directly with him.

I have authorized a settlement for Vernon L. Anderson in the amount of $22,200.00.

On June 14, 1974, Dr. Anderson executed a document entitled "Release of All Claims" which states:

Know all men by these presents that I, Vernon L. Anderson, in consideration of the payment of the sum of $22,200.00, by the Board of Trustees of Southern Illinois University, the receipt whereof is hereby acknowledged, have remised, released and forever discharged, and by these presents, do, for myself, and for my heirs, executors, administrators, and assigns, hereby release, remise, and forever discharge the Board of Trustees of Southern Illinois University, its agents, employees, successors, and assigns, of and from any and all manner of action or actions, either in law or in equity, contract, tort, or otherwise, which the undersigned might now have against the Board of Trustees of Southern Illinois University or its agents, or employees, and more particularly the claims or demands arising out of the employment or the lack thereof, as an Associate Professor in Foreign Languages and Literatures.

Said release is in settlement of any and all claims arising out of the employment or the lack thereof of Vernon L. Anderson. It is understood and agreed that this settlement is the compromising of a disputed claim, which includes, but is not limited to, such things as lack of due process, professional defamation, and damage to professional reputation, and that the payment or any other agreements contained herein shall not be construed as an admission of liability on the part of the Board of Trustees or its agents, or employees, by whom liability is presently denied.

This release contains the entire agreement between the parties hereto, and the terms of this release are contractual and not merely a recital.

I further state that I have carefully read the foregoing release and know the contents thereof, and sign the same as my own free act.

The settlement payment was made on June 24, 1974.

When the names of those who were being terminated became public, they were to some extent ostracized by other members of the faculty, their reputations were lowered in the eyes of some, and many of them found difficulty finding other employment at the same level. Petitioner had not been able to find employment in his chosen field at his former level up to the time of trial, despite the fact that letters of recommendation were written for him by members of the administrative staff and faculty of SIUC.

Opinion

The question presented to us is whether the lump-sum settlement received by Dr. Anderson from SIUC as the...