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compensatory to the injured party, whereas under Kentucky law punitive damages
served both to compensate the injured party and punish the wrongdoer.
Therefore, even though we held we would follow our position in the Miller
case, we also distinguished the Miller case from Horton v. Commissioner,
supra, on the basis of the difference in Kentucky and Maryland law.
The four circuits, in addition to the Fourth Circuit in Miller and the
Sixth Circuit in Horton, which have addressed the deductibility of punitive
damages have come to the conclusion reached by the Court of Appeals for the
Fourth Circuit in Miller that damages which are compensatory in nature are
excludable, but damages which are noncompensatory in nature are not excludable
under section 104(a)(2). The Court of Appeals for the Ninth Circuit held that
punitive damages were not excludable from gross income where the punitive
award was not a restoration of lost capital and was "'not intended to
compensate the injured party, but rather to punish the tort-feasor whose
wrongful action was intentional or malicious, and to deter him and others from
similar extreme conduct.'" (Hawkins v. United States, 30 F.3d 1077, 1083 (9th
Cir. 1994), citing City of Newport v. Fact Concerts, Inc., 453 U.S. 247, 266
(1981)). The Court of Appeals for the Ninth Circuit further found that
punitive damages were not awarded to a taxpayer "on account of" personal
injury, but rather were awarded "on account of" the tortfeasor's deplorable
conduct. Hawkins v. United States, supra at 1080.
In Reese v. United States, 24 F.3d 228 (Fed. Cir. 1994), the court found
that punitive damages received by a taxpayer in an action under the District
of Columbia Human Rights Act were not excludable since they were in the nature
of noncompensatory damages. The Federal Circuit, relying on a District of
Columbia case as well as the Supreme Court's language in City of Newport v.
Fact Concerts, Inc., supra, and similar cases, and on the legislative history
of section 104(a)(2), stated that "it would be inconsistent with the
legislative history to treat punitive damages as excludable from income, since
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