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Co. Transition Plan (MSTP). The MSTP provided a lump-sum payment
and IBM-funded health benefits that were more generous than the
benefits received under IBM’s regular severance program. IBM
informed its employees that it would withhold appropriate
Federal, State, and local taxes from MSTP lump-sum payments.
On June 30, 1993, Edward, Kenneth, and Thomas all agreed to
participate in the MSTP program. In order to join the MSTP, the
participants were required to sign a general release and covenant
not to sue, releasing IBM from all liabilities that might exist,
in contract, in tort, or any other type of claim, resulting from
the employees' termination. The payments petitioners received
were all calculated according to the MSTP formula, an amount
equal to 1 week’s pay for every 6 months of IBM service either
fully or partially completed as of the date of separation.
Edward, Kenneth, and Thomas received MSTP payments of $140,010,
$147,171, and $83,352, respectively. Petitioners established
their own consulting business, Strategic Choices, Ltd., following
their departure from IBM.
On their 1993 income tax returns petitioners excluded from
income the entire amounts of the MSTP payments received. In
disclosure statements filed with their returns, petitioners
asserted that the authority to exclude the payments from income
was section 104(a)(2).
OPINION
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