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created by other sections of the Code. Commissioner v. Glenshaw
Glass Co., 348 U.S. 426, 430-432 (1955).
One exclusion is contained in section 104(a)(2). It permits
a taxpayer to exclude from gross income "the amount of any
damages received (whether by suit or agreement and whether as
lump-sums or periodic payments) on account of personal injuries
or sickness". Section 1.104-(1)(c), Income Tax Regs., defines
the term "damages received (whether by suit or agreement)" as an
amount received (other than workmen's compensation) 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.
The Supreme Court, in addressing the scope of section
104(a)(2), has applied the default rule of statutory
interpretation that exclusions from income must be narrowly
construed. Commissioner v. Schleier, 515 U.S. at 328. Thus, a
taxpayer seeking the exclusion must demonstrate not only that the
underlying claim giving rise to the recovery was based on tort or
tort type rights but also that the damages were received on
account of personal injuries or sickness. Id. at 336-337.
In the absence of express language in the settlement
agreement stating how the payments made to petitioner should be
allocated "on account of personal injuries", the intent of the
payor (the credit union) in making the payments is a key factor
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