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excludable.3 The Court of Appeals for the Sixth Circuit, in affirming our
Horton case, primarily relied on the language of United States v. Burke, supra
at 237, which indicated that in order to determine whether an award is
excludable under section 104(a)(2), "we should focus 'on the nature of the
claim underlying [the taxpayer's] damages award.'" Horton v. Commissioner, 33
F.3d 625 (6th Cir. 1994), affg. 100 T.C. 93 (1993). The Court of Appeals for
the Fourth and Fifth Circuits have looked to State law to determine the nature
of punitive damages, while the Federal Circuit has interpreted opinions of the
Supreme Court as well as an opinion of the District of Columbia Court of
Appeals to determine whether punitive damages were compensatory in nature.
Commissioner v. Miller, supra at 589; Moore v. Commissioner, 53 F.3d 712, 715-
716 (5th Cir. 1995); Reese v. United States, supra at 231-232.4
However, most important to a consideration of whether in this case we
should follow our holding in Horton v. Commissioner, supra, is whether our
holding in the Horton case has effectively been overruled by the decision of
3 While the Court of Appeals for the Seventh Circuit has yet to address
this issue, it has favorably quoted Commissioner v. Miller, 914 F.2d 586 (4th
Cir. 1990), revg. 93 T.C. 330 (1989), stating in Kurowski v. Commissioner, 917
F.2d 1033, 1035-1036 (7th Cir. 1990), affg. T.C. Memo. 1989-149:
Section 104(a)(2) of the Internal Revenue Code provides that
gross income does not include "the amount of any damages received
(whether by suit or agreement) on account of personal injuries or
sickness." The rationale of the exemption is to free a taxpayer
from liability for an amount received as compensation for a loss
of that nature. "[T]he recovery does not generate a gain or
profit but only makes the taxpayer whole by compensating for a
loss." Commissioner v. Miller, 914 F.2d 586, 590 (4th Cir.1990),
citing 1 B. Bittker, Federal Taxation of Income, Estates and Gifts
para. 13.1.4 (1981). * * *
4 While Horton v. Commissioner, 33 F.3d 625 (6th Cir. 1994), affg. 100
T.C. 93 (1993), held that the nature of the claim underlying the taxpayer's
damages award decided whether punitive damages were excludable, the Court of
Appeals stated, after its conclusion that punitive damages under Kentucky
State law were partly compensatory in nature, "this case is distinguishable
both from Miller, in which the Fourth Circuit noted that under Maryland
defamation law, punitive damages served no compensatory purpose, and from
Hawkins, in which the Arizona taxpayers 'concede[d] that the punitive damage
award bears no relationship to their injuries and represents pure gain.'
(quoting Hawkins v. United States, 30 F.2d 1077, 1080 (9th Cir. 1994).
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