Foster v. Commissioner
| Decision Date | 13 June 1996 |
| Docket Number | Docket No. 19932-94.,Docket No. 10669-95.,Docket No. 19934-94. |
| Citation | 71 T.C.M. 3181 |
| Parties | Leslie R. Foster and Mattie J. Foster, et al.<SMALL><SUP>1</SUP></SMALL> v. Commissioner. |
| Court | U.S. Tax Court |
Leonard Lanny Leighton, San Antonio, Tex., for the petitioners.2 Joni D. Larson, for the respondent.
Respondent determined the following deficiencies in the 1993 Federal income taxes of Leslie R. Foster (Leslie) and Mattie J. Foster (Mattie), Charles W. Payne (Charles) and Carole B. Payne (Carole), and Wayne G. Smith (Wayne) and Marie Smith (Marie):
Docket No. Deficiency
Leslie and Mattie Foster ..... 19932-94 $16,303
Charles and Carole Payne ..... 19934-94 $13,670
Wayne and Marie Smith ........ 10669-95 $ 9,675
These consolidated cases are before us on respondent's motion for summary judgment under Rule 121.3 The issue for consideration is whether petitioners may exclude from gross income, under section 104(a)(2), amounts received from their employer in consideration for signing a general release agreement.
The disposition of a motion for summary judgment under Rule 121 is controlled by the following principles: (1) The moving party must show the absence of dispute as to any material fact and that a decision may be rendered as a matter of law; (2) the factual materials and the inferences to be drawn from them must be viewed in the light most favorable to the party opposing the motion; and (3) the party opposing the motion cannot rest upon mere allegations or denials, but must set forth specific facts showing there is a genuine issue for trial. Rule 121; Brotman v. Commissioner [Dec. 50,860], 105 T.C. 141 (1995).
Respondent's motion is based on a stipulation of facts and attached exhibits which are incorporated herein by this reference.
At the time the petitions were filed, Leslie and Mattie Foster resided in San Antonio, Texas; Charles and Carole Payne resided in Kissimmee, Florida; and Wayne and Marie Smith resided in Loveland, Colorado.
Prior to and during a portion of 1992, petitioners Leslie, Mattie, Charles, and Wayne were employed by the United Services Automobile Association (USAA). In 1992, each of them (hereinafter referred to as the participants) became eligible to participate in USAA's Special Retirement Offer (retirement program). To participate in the retirement program, which included the receipt of a single, lump-sum payment, each of the participants was required to sign a Special Retirement Offer Election Notification and General Release. The release agreements are identical but for the parties and the amounts of the payments.
The agreements provide in part as follows:
[Name] acknowledges that this payment is solely in exchange for the promises in his/her General Release and is not normally available under company policy to employees who resign. [Name] further acknowledges that such payment does not constitute an admission by the Released Parties of liability or of violation of any applicable law or regulation.
* * * [Name] agrees to release and discharge forever Released Parties from all causes of action, claims, demands, costs and expenses for damages which he/she now has, whether known or unknown, on account of his/her employment with USAA and its wholly owned subsidiaries and/or his/her retirement from employment with USAA and its wholly owned subsidiaries. His/her release includes, but is not limited to, any claims of discrimination on any basis, including race, color, national origin, religion, sex, age or handicap arising under any federal, state, or local statute, ordinance, order or law, including the Age Discrimination in Employment act, and any claim that the Released Parties, jointly or severally, breached any contract or promise, express or implied, or any term or condition of [Name]'s employment, and any claim for promissory estoppel arising out of [Name]'s employment with USAA and its wholly owned subsidiaries and any other issue arising out of his/her employment with USAA and its wholly owned subsidiaries and/or his/her retirement from such employment.
Leslie and Mattie signed the agreement on September 29, 1992; Charles signed the agreement on October 28, 1992; and Wayne signed the agreement on July 22, 1992.
In addition to the releases, the parties have stipulated that none of the participants had any preexisting claim of age discrimination, or other unlawful discrimination, against USAA, either formal or informal, written or oral, pending or inchoate, at the time the releases were signed.
In exchange for participating in the retirement program, each of the participants received payment from USAA in 1993, computed on the basis of time of service and rate of pay, in the following amounts:
Participant Amount
Leslie .......................... $48,858
Mattie .......................... 14,300
Charles ......................... 53,055
Wayne ........................... 40,320
In an informational document provided to the participants, USAA refers to the lump-sum payments as "special transition pay", and advised the participants that all applicable payroll taxes would apply to the payments. USAA reported the above amounts on the participants' respective W-2 wage statements.
Except as otherwise provided, gross income includes income from all sources. Sec. 61(a); Commissioner v. Glenshaw Glass Co. [55-1 USTC ¶ 9308], 348 U.S. 426 (1955). While section 61(a) is to be broadly construed, statutory exclusions from income must be narrowly construed. Commissioner v. Schleier [95-1 USTC ¶ 50,309], 515 U.S. ___, 115 S. Ct. 2159, 2163 (1995); Kovacs v. Commissioner [Dec. 48,871], 100 T.C. 124, 128 (1993), affd. without published opinion 25 F.3d 1048 (6th Cir. 1994).
Under section 104(a)(2), gross income does not include:
the amount of any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or sickness.
Section 1.104-1(c), Income Tax Regs, provides:
(c) Damages received on account of personal injuries or sickness. * * * The term "damages received (whether by suit or agreement)" 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.
Thus, an amount may be excluded from gross income only when it was received both: (1) through prosecution or settlement of an action based upon tort or tort type rights; and (2) on account of personal injuries or sickness. Commissioner v. Schleier [95-1 USTC ¶ 50,309], 515 U.S. at ___, 115 S. Ct. at 2166-2167; Wesson v United States [95-1 USTC ¶ 50,186], 48 F.3d 894, 901-902 (5th Cir. 1995); Bagley v. Commissioner [Dec. 51,047], 105 T.C. 396, 416 (1995).
Where damages are received pursuant to settlement agreements, as is the case herein,4 the nature of the claims that were the actual basis for settlement controls whether such damages are excludable under section 104(a)(2). United States v. Burke [92-1 USTC ¶ 50,254], 504 U.S. 229, 237 (1992); Robinson v. Commissioner [Dec. 49,648], 102 T.C. 116, 126 (1994), affd. in part, revd. in part [95-2 USTC ¶ 50,644] 70 F.3d 34 (5th Cir. 1995). "[T]he critical question is, in lieu of what was the settlement amount paid?" Bagley v. Commissioner, supra at 406.
Determination of the nature of the claim is factual. Bagley v. Commissioner, supra; Stocks v. Commissioner [Dec. 47,901], 98 T.C. 1, 11 (1992). The most important element is the intent of the payor. Robinson v. Commissioner, supra at 127.
Essential to petitioners' ability to satisfy the first requirement is the existence of claims "based upon tort or tort type rights". See supra p. 5. The parties and the amicus curiae have advanced extensive arguments as to whether such claims must have been valid claims that were asserted prior to the settlements. We are satisfied that the only requirement is that there be a claim which is bona fide, not necessarily valid, i.e., sustainable. Taggi v. United States [94-2 USTC ¶ 50,470], 35 F.3d 93, 96 (2d Cir. 1994); Robinson v. Commissioner, supra at 126; Stocks v. Commissioner, supra at 10. In this connection, we note that we have held that claims for potential future personal injuries do not qualify for exclusion under section 104(a). Roosevelt v. Commissioner [Dec. 27,017], 43 T.C. 77 (1964); Starrels v. Commissioner [Dec. 24,624], 35 T.C. 646 (1961), affd. [62-2 USTC ¶ 9526] 304 F.2d 574 (9th Cir. 1962). Such holdings imply that there must be an existing claim. Moreover, while it need not have been previously asserted, the absence of any knowledge of the claim on the part of the employer-payor obviously has a negative impact in determining the requisite intent of the payment.5 Any problems in respect of these factors are resolved in this case by the stipulation of the parties that there was no preexisting claim based on age or other unlawful discrimination. See supra p. 4.
Viewing the facts in the light most favorable to petitioners, see Kroh v. Commissioner [Dec. 48,128], 98 T.C. 383, 390 (1992), it can be argued that the stipulations as to the absence of "preexisting claim[s]" leave open the possibility of claims of discrimination based on the settlements themselves. Such a possibility has been adverted to in Webb v. Commissioner [Dec. 51,152(M)], T.C. Memo. 1996-50, and Galligan v. Commissioner [Dec. 49,485(M)], T.C. Memo. 1993-605, although neither of these cases accepted such an argument as a ground for decision. Whatever may be the merits of an assertion of such a window of opportunity, we see no basis for giving it any consideration herein. Petitioners do no more than infer such an approach; they do not set forth any supporting allegations of fact in support thereof beyond their general assertions to which we now turn our attention.
Petitioners' basis for asserting that there are substantial...
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