P & X Markets, Inc. - Page 6

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          whether petitioner received the settlement proceeds on account of           
          a personal injury.  Section 104(a)(2) and the regulations                   
          thereunder exclude settlement proceeds from a taxpayer’s gross              
          income when:  (1) The underlying cause of action giving rise to             
          the recovery of these funds is based upon tort or tort type                 
          rights and (2) the funds are received on account of personal                
          injuries or sickness.3  When a taxpayer fails either of these               
          tests, the settlement proceeds are not excludable under section             
          104(a)(2).  Sec. 104(a)(2); sec. 1.104-1(c), Income Tax Regs.;              
          see also Commissioner v. Schleier, 515 U.S.    , 115 S. Ct. 2159,           
          2163 (1995); United States v. Burke, 504 U.S. 229, 233 (1992);              
          Banks v. United States, 81 F.3d 874 (9th Cir. 1996).                        
               Respondent argues that petitioner, because it is a                     
          corporation, did not suffer a personal injury for purposes of               
          section 104.  Petitioner argues that it did receive the proceeds            
          on account of a personal injury, given the fact that it had only            
          one shareholder.  Petitioner argues that the consequences of the            
          Defendants’ “wrongful conduct” fell entirely upon Mr. Magaddino,            
          because he was its sole shareholder and it was conducting his               
          business.  Petitioner argues that it should not be denied the               
          benefit of section 104(a)(2) merely because Mr. Magaddino chose             
          to conduct his business as a corporation.                                   


               3 Sec. 104(a)(2) generally 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".           




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