Hughes A. and Marilyn B. Bagley - Page 20

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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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