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severance or termination pay, is expressly encompassed within the
definition of gross income. See sec. 61(a)(1); sec. 1.61-
2(a)(1), Income Tax Regs.
Section 104 provides for an exclusion from gross income for
certain payments received as compensation for injuries or
sickness. Specifically, section 104(a)3 provides in part:
SEC. 104. COMPENSATION FOR INJURIES OR SICKNESS.
(a) In General.--Except in the case of amounts
attributable to (and not in excess of) deductions
allowed under section 213 (relating to medical, etc.,
expenses) for any prior taxable year, gross income does
not include--
* * * * * * *
(2) 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 regulations under section 104 provide that the term
“damages received (whether by suit or agreement)” means “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.” Sec. 1.104-1(c), Income Tax Regs.
3The 1996 amendments to sec. 104 by the Small Business Job
Protection Act of 1996, Pub. L. 104-188, sec. 1605, 110 Stat.
1838, do not apply because the amendments are effective for
amounts received after Aug. 20, 1996.
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Last modified: November 10, 2007