Richard D. Waters - Page 8




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          settlement represented damages to him for a racial discrimination           
          claim he had against PayLess, and the Settlement Agreement was              
          broad enough to include such claim.  Petitioner contends that               
          throughout the period he was employed by PayLess, from 1986 to              
          1993, he was subjected to racial discrimination, which he                   
          discussed with his superiors at PayLess.  Petitioner alleges                
          that, although no suit was filed by petitioner against PayLess              
          (including one for racial discrimination), petitioner discussed             
          the matter with the attorneys representing plaintiffs in the                
          class action.  However, no action was taken by these attorneys to           
          assert a racial discrimination claim in the class action, and               
          there is no evidence that the matter was ever taken up with the             
          opposing attorneys who represented PayLess.  Nevertheless,                  
          petitioner contends that the proceeds from the class settlement             
          constituted damages for personal injuries; i.e., resulting from             
          racial discrimination practices by PayLess, relying on Rev. Rul.            
          1993-88, 1993-2 C.B. 61;3 Metzger v. Commissioner, 88 T.C. 834              
          (1987), affd. 845 F.2d 1013 (3d Cir. 1988); Morabito v.                     


               3    Rev. Rul. 93-88, 1993-2 C.B. 61, provides that                    
          compensatory damages, including back pay, received in                       
          satisfaction of a claim of racial discrimination under 42 U.S.C.            
          sec. 1981 and Title VII of the Civil Rights Act of 1964 are                 
          excludable from gross income as damages for personal injury under           
          sec. 104(a)(2).  In Rev. Rul. 96-65, 1996-2 C.B. 6, Rev. Rul. 93-           
          88 was declared obsolete prospectively from June 14, 1995.                  
          Petitioner's payment was received by him prior to June 14, 1995.            






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