1997 Tax Ct. Memo LEXIS 427 | Tax Ct. | 1997
1997 Tax Ct. Memo LEXIS 427">*427 Decision will be entered for respondent with respect to the deficiency and for petitioners with respect to the penalty under section 6662(a). 1997 Tax Ct. Memo LEXIS 427">*428
MEMORANDUM OPINION
DAWSON,
OPINION OF THE SPECIAL TRIAL JUDGE
POWELL,
The sole issue is whether Richard A. Adams (petitioner) is entitled to exclude a payment received from his former employer, IBM, from gross income1997 Tax Ct. Memo LEXIS 427">*430 pursuant to section 104(a) (2).
The facts may be summarized as follows. Petitioner was employed by IBM in 1956. As part of IBM's publicized downsizing petitioner was retired on September 30, 1993. The next day petitioner was employed by a joint venture between IBM and Eastman Kodak (Kodak) that became Technology Service Solutions (TSS). TSS apparently had been a service section of IBM that was eliminated from the corporate structure by forming the partnership with Kodak. Thus, for example, most, if not all, of petitioner's co-employees and supervisors came from IBM. In addition, it appears that petitioner kept several IBM corporate credit cards while at TSS.
When petitioner left IBM, he received a lump-sum payment of $ 36,105.50 pursuant to the terms of an IBM U.S. Marketing and Services Company Transition Payment Program (MSTP). In order to receive the MSTP petitioner was required to execute a "General Release and Covenant Not To Sue" (the Release). Under the Release, in consideration for the MSTP, petitioner agrees to release * * * [IBM] and its benefits plans from all claims, demands, actions or liabilities you may have against IBM of whatever kind, including but not limited1997 Tax Ct. Memo LEXIS 427">*431 to those which 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 Leave of Absence. * * * 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.
Petitioners did not include the $ 36,105.50 in their taxable income for 1993. Petitioners, however, attached a Form 8275, Disclosure Statement, and a copy of the Release to their joint Federal income tax return for 1993. These documents reflect the facts of the payment. Upon examination, respondent determined that the $ 36,105.50 was includable in gross income.
1997 Tax Ct. Memo LEXIS 427">*432 Section 61(a) defines gross income broadly as "all income from whatever source derived". Gross income specifically includes compensation for services. Sec. 61(a) (1). Exclusions from income are matters of legislative grace and are construed narrowly.
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". The phrase "damages received" is further defined as "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."
Petitioner's argument resembles a cat trying to scale a blackboard: he has nothing to set his claws into. First, petitioner does not point to any injury or sickness that he has suffered. Rather, he contends that, since IBM paid him for the Release, there must have been some injury and it is for the1997 Tax Ct. Memo LEXIS 427">*434 Court to discern the injury. While we may strive to be clairvoyant, this is, indeed, beyond our powers. Furthermore, while wrongful employment termination possibly may result in personal injury, generally the amount of lost wages received in such cases is not linked to that personal injury, and, therefore, such an award will not qualify for the exclusion from gross income provided in section 104(a) (2).
Second, even if we were to assume an injury or sickness, petitioner has not shown which portion, if any, of the payment was received in settlement of tort or tort type claims. The Release relieves IBM from liability from some claims that are not based on 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
Petitioner also argues that his employment with IBM never actually ceased. Even if we assume that this is true, the argument leads nowhere. Underlying this argument is petitioner's view that only "severance pay" is taxable. But, petitioner must showthat there is some provision in the1997 Tax Ct. Memo LEXIS 427">*436 Internal Revenue Code that exempts the amount that he received from taxation. Clearly section 104(a) (2) does not. Petitioner does not point to, and we are unaware of, any other section providing such an exemption under these facts. Regardless of how the amount received from IBM is characterized, it cannot escape the broad provisions of section 61.
Respondent also determined that petitioners are liable for an accuracy-related penalty under section 6662(a) for a substantial underpayment of tax. Section 6662(a) imposes a penalty in an amount equal to 20 percent of the portion of an underpayment to which that section applies. Section 6662(b) (2) provides that the penalty shall apply to any substantial underpayment due in tax. 2 There is a substantial underpayment if the amount of the underpayment exceeds the greater of 10 percent of the tax required to be shown on the return or $ 5,000. Sec. 6662(d) (1) (A). If, however, the taxpayer discloses the relevant facts on the return and there is a reasonable basis for the position, the penalty does not apply. Sec. 6662(d) (2) (B) (ii). Petitioners attached Form 8275, Disclosure Statement, and a copy of the Release to their return. Those documents1997 Tax Ct. Memo LEXIS 427">*437 reflect the facts of the payment. In deciding whether there was a reasonable basis for petitioners' position, we bear in mind that petitioners' return was filed before the Supreme Court's opinion in
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Footnotes
1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. Respondent's trial memorandum argues that the sec. 6662(a) penalty was attributable to negligence. The notice of deficiency refers to an underpayment penalty. Even if we were to consider the issue of negligence, our conclusion would be the same for the reasons subsequently stated herein.↩