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the Supreme Court in Commissioner v. Schleier, 515 U.S. ____, 115 S.Ct. 2159
(1995).
In the Schleier case, the taxpayer included as gross income the backpay
portion, but not the liquidated damages portion, of a settlement award
received under the Age Discrimination in Employment Act of 1967 (ADEA). The
Commissioner sent the taxpayer a notice of deficiency determining that the
taxpayer should have included the liquidated damages portion of his settlement
as gross income. We found for the taxpayer, holding that the entire
settlement was damages received "on account of personal injuries or sickness"
within the meaning of section 104(a)(2) and was, therefore, excludable from
gross income, and the Court of Appeals for the Fifth Circuit affirmed.
Commissioner v. Schleier, 26 F.3d 1119 (5th Cir. 1994).
The Supreme Court reversed the Court of Appeals. The Supreme Court
stated that the taxpayer argued that his damages were excluded from gross
income since they were "damages received * * * on account of personal injuries
or sickness." Commissioner v. Schleier, supra at 2162. The Supreme Court
rejected this argument, stating that the "plain language of [section
104(a)(2)] undermines [the taxpayer's] contention." Commissioner v. Schleier,
supra at 2163. The Supreme Court concluded that each element of the
settlement must satisfy the requirement under section 104(a)(2), that the
damages were received "on account of personal injuries or sickness."
Commissioner v. Schleier, supra at 2164. Since the backpay was not directly
caused by the injury, section 104(a)(2) did not apply. The Court reasoned:
In short, section 104(a)(2) does not permit the exclusion of * * *
[the taxpayer's] back wages
because the recovery of back wages was not "on
account of" any personal injury and because no
personal injury affected the amount of back wages recovered.
Commissioner v. Schleier, supra at 2164.
The taxpayer argued that liquidated damages fit within section
104(a)(2), citing Overnight Motor Transp. Co. v. Missel, 316 U.S. 572, 583
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