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petitioner's income for 1987 under section 104(a)(2). In a fairly recent
Court-reviewed case, Horton v. Commissioner, 100 T.C. 93 (1993), affd. 33 F.3d
625 (6th Cir. 1994), we held that the punitive damages received by a taxpayer
in a personal injury suit in a Kentucky State court were excludable from the
taxpayer's gross income under section 104(a)(2) as "damages received * * * on
account of personal injury". Our first basis for excluding punitive damages
from a taxpayer's income under section 104(a)(2) was a rejection of the
concept that section 104(a)(2) excludes only amounts that restore lost
capital, as opposed to amounts that would otherwise constitute gains or
accession to wealth. We stated that, in our view, the beginning and end of
the inquiry "should be whether the damages were paid on account of 'personal
injuries'". We then stated that this inquiry should be answered by
determining the nature of the underlying claim. We concluded that once the
nature of the underlying claim is established as one for personal injury, any
damages received on account of that claim, including punitive damages, are
excludable. In the Horton case, we stated that the recent decision of the
Supreme Court in United States v. Burke, 504 U.S. 229 (1992), supported the
analysis we had adopted. We stated that the taxpayers in the Burke case were
claiming that a backpay award in a sex discrimination suit under title VII was
excludable from income, but the Supreme Court, in holding to the contrary,
stated that in determining whether the section 104(a)(2) exclusion applies,
the nature of the claim underlying an award of damages is a critical factor.
In Horton v. Commissioner, supra, we held that punitive damages should be
excluded from a taxpayer's income under section 104(a)(2). We held that we
would follow our own opinion in Miller v. Commissioner, 93 T.C. 330 (1989),
rather than the reversal by the Court of Appeals, 914 F.2d 586 (4th Cir.
1990). However, we pointed out that the Court of Appeals for the Fourth
Circuit in the Miller case had concluded that under Maryland law punitive
damages were not excludable, since they were purely punitive and not
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