Hamm v. Commissioner

T.C. Memo. 1997-358

UNITED STATES TAX COURT

JOYCE M. AND THOMAS J. HAMM, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 2400-96. Filed August 5, 1997.

Joyce M. Hamm and Thomas J. Hamm, pro sese.

Amy A. Campbell, for respondent.

MEMORANDUM OPINION

WELLS, Judge: This case is before the Court on respondent's

motion for summary judgment pursuant to Rule 121(a).1

1

Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the taxable years at

issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

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Respondent determined a deficiency in petitioners' 1992

Federal income tax in the amount of $21,714.06 and an addition to

tax pursuant to section 6651(a)(1) in the amount of $92.61.

In support of respondent's motion for summary judgment,

respondent filed an affidavit along with exhibits. Petitioners

filed a written response and submitted an affidavit and an

exhibit opposing respondent's motion.

After a concession,2 the issue to be decided is whether

petitioners may exclude from income, pursuant to section

104(a)(2), a payment that petitioner Thomas J. Hamm (petitioner)

received from his employer in exchange for signing a general

release and covenant not to sue.

A motion for summary judgment is appropriate "if the

pleadings, answers to interrogatories, depositions, admissions,

and any other acceptable materials, together with the affidavits,

if any, show that there is no genuine issue as to any material

fact and that a decision may be rendered as a matter of law."

Rule 121(b); O'Neal v. Commissioner, 102 T.C. 666, 674 (1994)

(citing Kroh v. Commissioner, 98 T.C. 383, 389 (1992)). The

moving party bears the burden of establishing that these

requirements are met. O'Neal v. Commissioner, supra at 674, and

2

Petitioners have not contested respondent's determination

that petitioners are liable for the sec. 6651(a)(1) addition to

tax in the amount of $92.61. Accordingly, we consider

petitioners to have conceded the issue. Rybak v. Commissioner,

91 T.C. 524, 566 (1988).

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cases cited thereat. 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. Blanton v. Commissioner, 94 T.C.

491, 494 (1990). The opposing party cannot rest upon mere

allegations or denials set forth in that party's pleadings,

O'Neal v. Commissioner, supra at 674, and must make a showing

sufficient to establish the existence of each element essential

to that party's case and on which that party will bear the burden

of proof at trial, Celotex Corp. v. Catrett, 477 U.S. 317, 322

(1986) (interpreting Fed. R. Civ. P. 56(c), on which Rule 121(b)

is based).

In deciding the instant motion, we set forth a summary of

the facts relevant to our discussion. Rule 121(b); Sundstrand

Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965

(7th Cir. 1994). The facts presented below are based on the

parties' pleadings and moving papers, and other relevant

materials in the record and are viewed in terms most favorable to

petitioners. Blanton v. Commissioner, supra at 494.

Background

At the time they filed their petition in the instant case,

petitioners resided in Marietta, Georgia. During at least

January through July 1992, petitioner was employed by

International Business Machines Corp. (IBM). On July 28, 1992,

petitioner was informed by his manager, Catherine F. Allman, that

the project to which he was assigned would no longer be funded

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after October 1992 and that he should find another position

within IBM or sign up for the IBM Modified and Extended

Individual Transition Option Program (the ITO II Program). The

ITO II program provided a lump-sum cash payment and other

benefits in exchange for signing a General Release and Covenant

Not to Sue (the release).

On July 31, 1992, after 2 days of unsuccessfully seeking

another position within IBM, petitioner signed up for the ITO II

program and executed the release, which provided in relevant

part:

If you feel that you are being coerced to sign this

release or that your signing would for any reason not

be voluntary, or you believe the process by which you

have been offered this release or the payment in

exchange for this release is discriminatory, * * * you

are encouraged to discuss this with your management or

Personnel before signing this release. * * *

In exchange for the sums and benefits which you will

receive pursuant to the terms of the * * * [ITO II

Program], Thomas J. Hamm[3] (hereinafter "you") agrees

to release * * * [IBM] from all claims, demands,

actions or liabilities you may have against IBM of

whatever kind, including but not limited to those which

are related to your employment with IBM or the

termination of that employment. You agree that this

also releases from liability IBM's agents, directors,

officers, employees, representatives, successors and

assigns (hereinafter "those associated with IBM"). * *

* You also agree that this release covers, but is not

limited to, claims arising from the Age Discrimination

in Employment Act of 1967, as amended, Title VII of the

Civil Rights Act of 1964, as amended, and any other

federal or state law dealing with discrimination in

employment on the basis of sex, race, national origin,

3

The name Thomas J. Hamm was typed into a space provided in

the Release.

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religion, disability, or age. You also agree that this

release includes claims based on theories of contract

or tort, whether based on common law or otherwise.

This release does not include your vested rights, if

any, in the IBM Retirement Plan, which survive

unaffected by this release.

* * * * * * *

3. This release does not waive any claims that

you may have which arise after the date you sign this

release.

* * * * * * *

6. In the event of rehire by IBM or any of its

subsidiaries as a regular employee, you understand that

IBM reserves the right to require repayment of a

prorated portion of the ITO II Program payment. The

amount of repayment will be based on the number of

weeks off the IBM payroll compared with the number of

weeks' salary used to calculate your payment.

The Pre-Retirement Leave of Absence Agreement provides:

Your leave will begin 08/01/92 and will end 12/31/00. Based

on your committed plan to retire immediately following your

leave, your effective date of retirement will be 12/31/00.[4]

Once your leave begins, the committed retirement date may

not be changed to a later one; however, an earlier date upon

which you are retirement eligible will be allowed.

In exchange for participating in the ITO II Program,

petitioner received a payment of $71,809.69 (the ITO payment).

According to respondent's motion, as of the date of the motion,

petitioner had not filed any "tort-type" claims against IBM.

For calendar year 1992, petitioner received a Form W-2 from

IBM showing wages of $132,521.60 and Federal income tax withheld

of $22,982.60, and a Form W-2 from Management Recruiters

4

The dates were either typed or handwritten in the space

provided in the Pre-Retirement Leave of Absence Agreement.

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International, Inc., showing wages of $2,650 and no Federal

income tax withheld for that year. On their 1992 joint Federal

income tax return, petitioners reported $61,040.31 as wage income

(line 7). Petitioners attached to their return a Form 8275

Disclosure Statement asserting that the ITO payment in the amount

of $71,809.69 was excludable from their gross income pursuant to

section 104(a)(2) "as a payment received in exchange for the

release and settlement of tort-type rights, as part of IBM

Corp.'s ITO II Program".

Respondent determined that petitioners did not establish

that any amount was excludable from their gross income pursuant

to section 104(a)(2). Consequently, respondent increased

petitioners' gross income by $74,131.29 to conform to the amounts

reported on petitioner's Forms W-2. Additionally, respondent

disallowed itemized deductions in the amount of $966.08 as an

automatic adjustment resulting from the increase in petitioners'

gross income.

Discussion

The instant case is another among many in this Court where

we have been presented with the issue of whether proceeds

received pursuant to IBM's ITO II program are excludable from the

recipient's gross income pursuant to section 104(a)(2). See,

e.g., Gajda v. Commissioner, T.C. Memo. 1997-345; Lubart v.

Commissioner, T.C. Memo. 1997-343; Thorpe v. Commissioner, T.C.

Memo. 1997-342; Phillips v. Commissioner, T.C. Memo. 1997-336;

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Brennan v. Commissioner, T.C. Memo. 1997-317; Morabito v.

Commissioner, T.C. Memo. 1997-315; Keel v. Commissioner, T.C.

Memo. 1997-278; Webb v. Commissioner, T.C. Memo. 1996-50.

In deciding the instant motion for summary judgment, we must

examine whether respondent has established that, as a matter of

law, petitioners are not entitled to exclude the ITO payment from

gross income pursuant to section 104(a)(2). Except as otherwise

provided, gross income includes income from all sources. Sec.

61(a); Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429-430

(1955). Although section 61(a) is to be broadly construed,

statutory exclusions from income must be narrowly construed.

Commissioner v. Schleier, 515 U.S. 323, 328 (1995).

Section 104(a)(2) provides that 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". The regulations

provide that "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." Sec. 1.104-1(c), Income Tax Regs. Accordingly, to

exclude damages received by settlement agreement from gross

income pursuant to section 104(a)(2), the taxpayer must establish

that: (1) The cause of action giving rise to the recovery is

"based upon tort or tort type rights", and (2) the damages were

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received "on account of personal injuries or sickness". Sec.

104(a)(2); Commissioner v. Schleier, supra at 337.

Where amounts 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 from

gross income pursuant to section 104(a)(2). United States v.

Burke, 504 U.S. 229, 237 (1992). The critical question is "in

lieu of what were damages awarded" or paid. Bent v.

Commissioner, 87 T.C. 236, 244 (1986), affd. 835 F.2d 67 (3d Cir.

1987); see Bagley v. Commissioner, 105 T.C. 396, 406 (1995).

Consideration of the nature of the claim is a factual inquiry.

Robinson v. Commissioner, 102 T.C. 116, 127 (1994), affd. in

part, revd. in part and remanded 70 F.3d 34 (5th Cir. 1995).

If the settlement agreement lacks express language stating

the purpose for which the settlement proceeds were paid, then the

most important factor in deciding whether the section 104(a)(2)

exclusion applies is the intent of the payor as to the purpose in

making the payment. Stocks v. Commissioner, 98 T.C. 1, 10

(1992), and cases cited therein. If the payor's intent cannot be

clearly discerned from the settlement agreement, we examine all

of the facts and circumstances in the case. Robinson v.

Commissioner, supra at 127.

In the instant case, respondent contends that petitioner's

failure to file a claim prior to signing the release precludes

petitioners' exclusion of the ITO payment from gross income

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pursuant to section 104(a)(2). Respondent cites Taggi v. United

States, 35 F.3d 93, 96 (2d Cir. 1994), where the court concluded,

after noting that no "claims or threats of litigation" existed,

that the settlement payment "did not constitute a 'settlement

agreement entered into in lieu of . . . [a legal suit or action

based upon tort or tort type rights].'" The court expressly

stated that "Because no prosecution of a suit for personal

injuries" preceded the settlement, the taxpayer's right to

exclude the settlement proceeds from gross income "depends upon

whether the [settlement] agreement constituted a 'settlement

agreement . . . in lieu of such prosecution.'" Id. at 95.

Accordingly, the court examined whether the settlement proceeds

were attributable to a bona fide dispute based upon tort or tort

type rights. Contrary to respondent's interpretation of Taggi,

we view the court's statement that no "claims or threats of

litigation" existed as merely supporting the court's conclusion

that the settlement proceeds were not attributable to a bona fide

dispute based upon tort or tort type rights, not a statement of

law that the failure to file a claim before signing a settlement

agreement precludes exclusion of the settlement proceeds from

gross income pursuant to section 104(a)(2).

As stated supra, pursuant to section 104(a)(2) and the

regulations thereunder, the exclusion from gross income applies

to damages received by "suit" or by "settlement agreement" in

lieu of such a suit. Respondent has not cited, and we have not

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found, any authority for the proposition that the taxpayer must

file a claim prior to the settlement agreement in order for the

settlement proceeds to qualify for the exclusion. Accordingly,

we reject respondent's argument that the failure to file a claim

prior to signing the release precludes exclusion of the ITO

payment from gross income pursuant to section 104(a)(2).

We do note, however, that the failure to file such a claim

may be taken into account in deciding whether the taxpayer

released a tort or tort type claim. See Webb v. Commissioner,

T.C. Memo. 1996-50. Additionally, we have specifically stated

that a claim need not have been previously asserted against the

employer, although the absence of any knowledge of the claim on

the part of the employer-payor has a negative impact in

concluding whether the employer-payor had the requisite intent of

making the payment "on account" of a personal injury. Keel v.

Commissioner, T.C. Memo. 1997-278; Sodoma v. Commissioner, T.C.

Memo. 1996-275.

Based on our review of the facts and circumstances in the

instant record, we conclude that the ITO payment was severance

pay to petitioner and not settlement proceeds for the release of

tort or tort type claims. Several considerations support our

conclusion. On July 28, 1992, petitioner was informed that the

project to which he was assigned would no longer be funded after

October 1992 and that he should find another position within IBM

or sign up for the ITO II program. On July 31, 1992, after 2

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days of unsuccessfully seeking another position within IBM,

petitioner signed up for the ITO II program and executed the

release and the Pre-Retirement Leave of Absence Agreement. The

foregoing sequence of events supports our conclusion that the ITO

payment was severance pay to petitioner.

Additionally, we find support in the ITO II program

documents5 for our conclusion that the ITO payment was severance

pay. Paragraph 6 of the release provides the terms for repaying

the ITO payment in case of rehire by IBM and states: "The amount

of repayment will be based on the number of weeks off the IBM

payroll compared with the number of weeks' salary used to

calculate your payment." (Emphasis added.) The fact that the

number of weeks of petitioner's salary was used in calculating

petitioner's ITO payment makes the ITO payment appear to be

severance pay and not damages for personal injuries. Moreover,

the Pre-Retirement Leave of Absence Agreement provides: "Your

leave will begin 08/01/92 and will end 12/31/00. Based on your

committed plan to retire immediately following your leave, your

effective date of retirement will be 12/31/00. Once your leave

begins, the committed retirement date may not be changed to a

5

The ITO II program documents in the instant case include an

apparently complete set of documents related to the ITO II

program (with an unsigned release and unsigned Pre-Retirement

Leave of Absence Agreement) that was submitted by petitioners

with their trial memorandum, and the executed release and

executed Pre-Retirement Leave of Absence Agreement that were

submitted by respondent in the affidavit supporting the instant

motion.

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later one". The fact that the ITO II program provided for a

leave of absence which ultimately determined the effective date

of petitioner's retirement further supports our conclusion that

the ITO payment was severance pay related to retirement.

Our conclusion is further supported by the fact that the ITO

II program was implemented to "reduce the number of employees"

and to "help IBM become more competitive and efficient". The

first page of the ITO II program documents includes a "Summary

Plan Description" that states:

Due to staffing dynamics and IBM's need to become more

competitive and efficient, IBM intends to reduce the

number of employees in eligible skill families at

various locations. * * * The program is intended to

help IBM become more competitive and efficient by

reducing its workforce while retaining essential skills

and to assist employees who choose to participate in

the program in making the transition into a new career

or retirement. The ITO II program is voluntary;

however, if we do not have sufficient volunteers for

the ITO II program, IBM will continue to take

involuntary actions in the near future * * *

The fact that eligibility for participation in the ITO II

program was determined, in part, by whether the employee's

position fell within certain "functional skill families" also

supports our conclusion. Eligibility for participation in the

ITO II program was determined as follows:

The ITO II Project Office will establish 'functions'

within IBM. Within each function, the Project Office

will group similar skills together into 'families'

creating functional skill families. Based on these

business decisions, management will decide which

functional skill families are eligible to participate

in the program. * * *

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Furthermore, the method used by IBM in calculating the ITO

payment supports our conclusion. The ITO payment was calculated

as follows:

Employees who are approved for and comply with the

terms of the ITO II program will receive the greater of

eight weeks pay or one week's pay for each six months

of service fully or partially completed, up to a

maximum of 52 weeks' pay. * * * The payment will be

made in a lump sum and be based on the employee's

regular salary and years of service as of the day he or

she leaves active employment. * * * This payment is in

lieu of any other form of separation pay or exit

incentive program to which the employee is, may or

might have become entitled. It is IBM's intent to pay

only one incentive/separation type payment to an

employee. * * *

Indeed, in making the ITO payment, which was to be "in lieu of

any other form of separation pay or exit incentive program",

IBM's intent appears to be to "pay only one incentive/separation

type payment to an employee". (Emphasis added.) Accordingly,

based on our review of the facts and circumstances in the instant

record, we conclude that the ITO payment was paid by IBM to

petitioner as severance pay, not to release a tort or tort type

claim.

As respondent has made a prima facie case that the

requirements of the section 104(a)(2) exclusion are not met,

petitioners cannot rest upon mere allegations or denials but must

set forth specific facts showing that there is a genuine issue

for trial. Celotex Corp. v. Catrett, 477 U.S. at 322; O'Neal v.

Commissioner, 102 T.C. at 674. Petitioners contend that they are

entitled to exclude the ITO payment from gross income pursuant to

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section 104(a)(2) because the ITO II program was "designed to

avoid prosecution of a legal suit or action based upon tort or

tort-type rights".6 Petitioners allege that, because employees

who filed claims within 7 days of signing the ITO II agreement

had to return any settlement payments, the settlement payment was

made to avoid tort type litigation. Alternatively, petitioners

contend that Ms. Allman caused injury to petitioners by coercing

petitioner to sign up for the ITO II program and to terminate

from IBM. Additionally, petitioners allege that, as a result of

having to sign up for the ITO II program and to terminate

employment with IBM through coercion and duress, petitioner had

to accept a minimum-wage position to start a new career, suffered

periods of unemployment, assumed debts totaling $25,000, and

experienced great personal and family stress. As a final

alternative, petitioners contend that they would have suffered

even greater injury by filing "a claim against IBM instead of

accepting the ITO II settlement".

Petitioners' allegations are merely conclusions and not

specific allegations of fact that, if true, would support a

finding that the ITO payment was for personal injury or sickness

as required by section 104(a)(2). For purposes of the instant

6

Additionally, we note that, in their petition, petitioners

contested the deficiency on the grounds that the ITO payment "was

made, under taxpayer duress, as consideration to the taxpayer for

release of employer for any claim the taxpayer may have against

employer for age discrimination and other potential tort claims."

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motion, we accept as true that petitioner suffered injury when

Ms. Allman coerced petitioner to sign up for the ITO II program

and to terminate from IBM, that petitioner experienced great

personal and family stress as a result of his having to sign up

for the ITO II program and to terminate employment with IBM

through coercion and duress, and that petitioners would have

suffered even greater injury by filing a suit against IBM instead

of accepting the ITO payment. Petitioners, however, have alleged

no specific facts showing that the injuries they cited were: (1)

The basis for a tort or tort type claim against IBM that

petitioner released when he signed the ITO II program release and

(2) the basis on account of which IBM made the ITO payment. Even

if the injuries cited by petitioners could form the basis for

some tort or tort type claim against IBM (and we do not so find

in this opinion), such a claim would not be a basis for

concluding that the ITO payment was made by IBM on account of

such injuries.

In sum, petitioners have alleged no specific facts showing

that petitioner had a tort or tort type claim7 against IBM that

he released in exchange for the ITO payment. Additionally,

7

As we discussed supra, to exclude a settlement payment

pursuant to sec. 104(a)(2), the taxpayer need not file a claim.

However, the taxpayer must have a claim that is bona fide but not

necessarily valid; i.e., sustainable. Robinson v. Commissioner,

102 T.C. 116, 126 (1994), affd. in part, revd. in part and

remanded 70 F.3d 34 (5th Cir. 1995); Stocks v. Commissioner, 98

T.C. 1, 10 (1992).

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petitioners have alleged no specific facts showing that the ITO

payment was allocable to tort or tort type damages for personal

injuries or sickness.

Viewing the facts in a light most favorable to petitioners,

Blanton v. Commissioner, 94 T.C. at 494, we conclude that

respondent has made a prima facie case that petitioner did not

release any tort or tort type claim in exchange for the ITO

payment. Petitioners have failed to offer countervailing

assertions having sufficient specificity to cause us to conclude

that there is any genuine issue of material fact which requires a

trial. We have considered all of the parties' remaining

arguments and find them to be without merit. Under these

circumstances, respondent is entitled to summary judgment as a

matter of law. Rule 121(d); Abramo v. Commissioner, 78 T.C. 154,

164 (1982). As petitioners' gross income is increased in the

amount of $74,131.29, we sustain respondent's disallowance of

itemized deductions in the amount of $966.08 as an automatic

adjustment.

To reflect the foregoing,

Respondent's motion for

summary judgment will be granted,

and decision will be entered

for respondent.