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punitive damages in no way resemble a return of capital". Reese v. United
States, supra at 233. The Court of Appeals for the Federal Circuit rejected
the taxpayer's argument that United States v. Burke, 504 U.S. 229 (1992), was
applicable to the issue it was considering on the ground that the Burke case
did not involve punitive damages and was, therefore, not controlling or even
relevant to the issue. Reese v. United States, supra at 233.
The Court of Appeals for the Fifth Circuit has recently decided that
noncompensatory punitive damages are not excludable under section 104(a)(2).
In Wesson v. United States, 48 F.3d 894 (5th Cir. 1995), the court concluded,
as did the Federal Circuit, that the Supreme Court did not address whether
punitive damages are excludable from gross income in United States v. Burke,
supra. The Fifth Circuit agreed with the opinions of the Courts of Appeals
for the Fourth, Ninth, and Federal Circuits that Congress did not intend that
noncompensatory damages be excludable from a taxpayer's income, since such
damages did not restore lost capital. Wesson v. United States, supra at 899.
Since the Fifth Circuit concluded that under Mississippi law punitive damages
were noncompensatory in nature, it held punitive damages not to be excludable
from income under section 104(a)(2). Wesson v. United States, supra.2 On
September 19, 1995, the Court of Appeals for the Tenth Circuit issued an
opinion in O'Gilvie v. United States, 66 F.3d 1550 (10th Cir. 1995),
concluding: "We thus join the majority of the circuits that have addressed
this issue in holding that section 104(a)(2) does not exclude punitive damages
from income."
Of the six Courts of Appeals which have decided the issue of exclusion
from income of punitive damages, five have held that punitive damages are not
2 In Estate of Moore v. Commissioner, 53 F.3d 712 (5th Cir. 1995), revg.
T.C. Memo. 1994-4, the Court of Appeals for the Fifth Circuit also held that
punitive damages were noncompensatory under Texas law and, therefore, were not
excludable from gross income under sec. 104(a)(2).
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