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income. According to respondent, petitioner has not established
that this amount was received as damages on "account of personal
injuries", as defined under section 104(a)(2). Petitioner
disagrees, arguing that the settlement was meant to address a
plethora of tort claims against ABMI, including "wrongful
termination of employment under California law * * * retaliatory
discharge, First Amendment claims, malicious prosecution,
defamation, disparagement, trade libel, emotional distress, and
national origin discrimination."
Although section 61(a) defines gross income to include "all
income from whatever source derived," an exception may be found
under section 104(a)(2) and the regulations thereunder. Section
104(a)(2) provides that "the amount of any damages received
(whether by suit or agreement * * *) on account of personal
injuries or sickness" is excludable from gross income. Section
1.104-1(c), Income Tax Regs., provides that:
The term "damages received (whether by suit or
agreement)" means an amount received (other than
workmen's compensation) through prosecution of a legal
suit or action based upon tort or tort type rights, or
through a settlement agreement entered into in lieu of
such prosecution.
In determining whether a settlement payment was intended to
compensate for personal injuries, we are not concerned with the
validity of the claims settled by the settlement or legal suit.
Seay v. Commissioner, 58 T.C. 32, 37 (1972). Rather, we focus on
the nature of the matter settled. Id. For purposes of section
104(a)(2), we look to State law (here, California law) to decide
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