1

 Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the year at issue. All Rule

references are to the Tax Court Rules of Practice and Procedure.

T.C. Memo. 1998-392

UNITED STATES TAX COURT

JAMES J. AND LINDA J. HARFORD, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

 Docket No. 8436-97. Filed November 6, 1998.

 James J. Harford, pro se.

 Linda A. Neal, for respondent.

MEMORANDUM OPINION

 COUVILLION, Special Trial Judge: This case was heard

pursuant to section 7443A(b)(3) and Rules 180, 181, and 182.1

 Respondent determined a deficiency of $5,457 in petitioners'

Federal income tax for 1994.
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The sole issue for decision is whether $24,060.44 received

by James J. Harford (petitioner husband) as a result of the

termination of his employment is excludable from petitioners'

1994 gross income, pursuant to section 104(a)(2), as damages

received on account of personal injury or sickness.

 Some of the facts were stipulated, and those facts, with the

annexed exhibits, are so found and are incorporated herein by

reference. At the time the petition was filed, petitioners'

legal residence was Durham, North Carolina.

Petitioner husband received a bachelor of science degree in

electrical engineering from Georgia Tech University in 1984. 

That same year petitioner husband became employed by

International Business Machines Corp. (IBM) in the company's

Kingston, New York, facility. In 1987, petitioner husband moved

to the Raleigh-Durham area of North Carolina and remained

employed with IBM. Following his move to North Carolina, and

concurrent with his continued employment with IBM, petitioner

husband pursued and received a master's degree in computer

science from the University of North Carolina.

During May 1994, the manager of petitioner husband's

division at IBM (manager) became concerned about the delay in

completing a development project that petitioner husband's

division was working on. Consequently, the manager advised

petitioner husband and the other members of his division that all
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vacation would be canceled through the end of June 1994 in order

for the project to be completed. Petitioner husband informed his

manager that he would be unable to comply with the cancellation

of vacation, as he was committed to attend a reunion of his

extended family that had been planned and paid for several months

prior thereto and had been previously approved by IBM management. 

Petitioner husband's manager warned him that, if he followed

through with his vacation plans and failed to report for work as

required, he would be dismissed due to insubordination. 

Petitioner husband defied the cancellation of leave and attended

his family reunion, failing to report for work for a week during

late May and early June.

When petitioner husband returned to work following his

vacation, he was informed by his manager that he would not be

dismissed; however, he was given two options regarding his

employment with IBM. Petitioner husband was given the choice to

either (1) submit a voluntary resignation from IBM and obtain the

benefits provided in a severance package created by IBM for

employees who resigned or retired as a result of corporate

downsizing, or (2) remain employed with IBM but sustain a

demotion in performance evaluation ranking, undergo a

probationary period of 6 months, and engage in a significant

amount of overtime work. Petitioner husband chose to voluntarily

resign from IBM and accept the severance package.
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Pursuant to the termination of his employment, petitioner

husband received benefits under the "Networking Hardware Division

and Networking Software Division Resource Transition Program"

(NRTP) established by IBM to induce employees to resign or retire

early under a plan of corporate downsizing. Under the NRTP, a

participating employee was entitled to a lump-sum payment,

temporary medical and dental insurance (which the employee could

continue later at his or her own cost), and career transition

services. The lump-sum payment was payable at the time of a

participating employee's departure and was reduced by any

advances or loans owed to IBM at the time of departure. If a

participating employee resumed his employment with IBM within a

specified period, a prorated amount of the lump-sum payment was

required to be repaid.

In connection with his participation in NRTP, petitioner

husband executed, on July 15, 1994, a document entitled "General

Release and Covenant Not to Sue" (the Release) setting out the

terms of his severance package. The Release stated:

In exchange for the sums and benefits which you will

receive pursuant to the terms of the * * * [NRTP] * * *

[petitioner husband] agrees to release International

Business Machines Corporation, its subsidiaries and

affiliates, and its benefits plans, (hereinafter "IBM")

from all claims, demands, actions or liabilities you

may have against IBM of whatever kind, including but

not limited to those that are related to your

employment with IBM, the termination of that

employment, or other severance payments or your

eligibility or participation in the Retirement Bridge
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Leave of Absence, or any claims for attorneys' fees. 

You agree that this also releases from liability IBM's

agents, directors, officers, employees,

representatives, successors and assigns (hereinafter

"those associated with IBM"). 

You agree that you have voluntarily executed this

Release on your own behalf, and also on behalf of any

heirs, agents, representatives, successors and assigns

that you may have now or in the future. 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, state or

local law dealing with discrimination in employment,

including but not limited to discrimination based on

sex, race, national origin, religion, disability,

veteran status or age. You also agree that this

Release includes claims based on theories of contract

or tort whether based on common law or otherwise.

Petitioner husband was entitled to revoke his signature within 7

days of signing the Release; however, had he done so, he would

have been required to return his lump-sum payment and would have

become ineligible for the other NRTP benefits. Petitioner

husband received a lump-sum payment of $24,060.44 in connection

with his participation in NRTP. Petitioner husband suffered no

injury or sickness at the time of his resignation. Neither prior

nor subsequent to his resignation did petitioner husband file a

complaint or claim with IBM or against IBM regarding any type of

discrimination, personal injury, or wrongful termination.

On their 1994 Federal income tax return, petitioners failed

to report as income the $24,060.44 received by petitioner husband
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2

IBM issued to petitioner husband a Form W-2, Wage and Tax

Statement, for 1994 reflecting wages, tips, and other

compensation of $64,432.30, which included the $24,060.44 paid to

petitioner husband upon termination of his employment. 

Petitioners attached a copy of this Form W-2 to their 1994

return.

upon his termination of employment with IBM.2 Petitioners

attached to their return a Form 8275, Disclosure Statement,

explaining that they had not included the subject $24,060.44 in

their gross income for 1994 because they believed such payment

was:

not taxable under Section 104 of the Internal Revenue

Code because the payment was made as a consideration to

the taxpayer for his release of his employer for any

claim he might have against his employer for age

discrimination and other potential tort claims.

In the notice of deficiency, respondent determined that the

subject $24,060.44 was includable in petitioners' gross income

for 1994. This was the only adjustment in the notice of

deficiency.

The sole issue is whether the $24,060.44 received by

petitioner husband as a result of the termination of his

employment with IBM is excludable from petitioners' 1994 gross

income pursuant to section 104(a)(2) as damages received on

account of personal injury or sickness. Except as otherwise

provided, gross income includes "all income from whatever source

derived". Sec. 61(a); Commissioner v. Glenshaw Glass Co., 348
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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, 327-

328 (1995).

Section 104(a)(2) excludes from gross income "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 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." Thus, in order to exclude damages from gross

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

(1) The underlying cause of action is "based upon tort or tort

type rights", and (2) the damages were received "on account of

personal injuries or sickness." Commissioner v. Schleier, supra

at 336-337.

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 under section 104(a)(2). United States v. Burke,

504 U.S. 229, 237 (1992). The crucial question is "in lieu of

what was the settlement amount paid." Bagley v. Commissioner,
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105 T.C. 396, 406 (1995), affd. 121 F.3d 393 (8th Cir. 1997).

Determining 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). 

Petitioners have failed to demonstrate any personal injury

or sickness suffered by petitioner husband. Although

petitioners' arguments are not entirely clear from the record,

the Court surmises petitioners' contention to be that, since

petitioner husband signed the Release in exchange for the

$24,060.44 payment, petitioner husband must have had some

potential claim against IBM. Petitioners are mistaken. The

execution of a general release against liability does not, in and

of itself, confirm that the releasing party indeed possesses a

bona fide cause of action against the party released.

The record does not show that petitioner husband had a

potential claim of any kind against IBM, including that for

personal injury, sickness, or wrongful termination. In point of

fact, petitioner husband was not terminated but rather was given

the option to remain with IBM on a probationary status for

several months and be subject to some discipline for his direct

defiance of a company mandate. Instead, petitioner husband chose

to resign voluntarily from IBM and accept a severance package. 

Every indication in the record leads the Court to conclude that

the termination of petitioner husband's employment with IBM was
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purely voluntary and resulted directly from his own

insubordination, and, had he complied with the company's

cancellation of leave policy, he would have avoided a

confrontation with his supervisor and ultimately the company. 

The lump-sum payment thus appears to be severance pay rather than

a payment for personal injury, and severance pay, like the pay it

replaces, is taxable as income. See Brennan v. Commissioner,

T.C. Memo. 1997-317.

Even if the Court were to conclude that IBM paid petitioner

husband the $24,060.44 in settlement of a possible claim for

wrongful termination from IBM, the amount of lost wages received

in such a situation is generally not linked to any personal

injury, and, thus, such an award would not qualify for the

exclusion from gross income provided in section 104(a)(2). 

Commissioner v. Schleier, supra at 330.

The Court recognizes that mental distress may suffice as a

personal injury or sickness under the law applicable to the

taxable year in issue, id. at 329 n.4; however, petitioners have

failed to show that any inconvenience or stress experienced by

petitioner husband as a result of his resignation from IBM

constituted a personal injury or sickness. There is no evidence

that petitioner husband's distress, if any, manifested itself as

physical symptoms, required him to seek medical help, or

incapacitated him in any manner.
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3

Where a settlement agreement lacks express language stating

what the settlement amount was paid to settle, then the most

important factor is the intent of the payor. Knuckles v.

Commissioner, 349 F.2d 610, 612-613 (10th Cir. 1965), affg. T.C.

Memo. 1964-33. The Court is satisfied that it was not IBM's

intent for any portion of the subject payment to be paid as a

settlement of a tort or tort type claim on account of a personal

injury or sickness.

Even if petitioner husband sustained personal injury or

sickness, petitioners failed to show what portion, if any, of the

$24,060.44 payment was allocable to tort or tort type claims. 

The Release contains broad language relieving IBM from liability

for many potential claims, some of which are not based in tort or

tort type rights, including contract claims, claims under the Age

Discrimination in Employment Act of 1967 (ADEA), Pub. L. 90-202,

81 Stat. 602, as amended 29 U.S.C. secs. 621-634 (1994), and

claims under title VII of the Civil Rights Act of 1964, Pub. L.

88-352, 78 Stat. 241, 253, as amended 42 U.S.C. secs. 2000e-1 to

-17 (1994). See, e.g., Commissioner v. Schleier, supra at 336

(holding that settlements for claims made under the ADEA are not

based on tort or tort type rights for purposes of section

104(a)(2)); United States v. Burke, supra at 241 (holding awards

of back wages under title VII do not redress tort type personal

injury within the meaning of section 104(a)(2)). The Release

does not state that any portion of the amount petitioner husband

received was for any specific potential tort or tort type claim

against IBM.3 Thus, on this record, it would be impossible for
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the Court to determine a specific tort or tort type claim or

claims that may have served as a basis for settlement, if any. A

failure to show the specific amount of the payment allocable to

the claims of tort or tort type damages for personal injuries

results in the entire amount being presumed not to be excludable. 

See Taggi v. United States, 35 F.3d 93, 96 (2d Cir. 1994); Getty

v. Commissioner, 91 T.C. 160, 175-176 (1988), affd. on this issue

and revd. on other issues 913 F.2d 1486 (9th Cir. 1990).

The $24,060.44 settlement payment petitioner husband

received from IBM in 1994 does not satisfy the requirements for

exclusion of the payment under section 104(a)(2). Consequently,

on this record, the Court holds that such payment is includable

in petitioners' gross income for that year.

 Decision will be entered

for respondent.