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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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Last modified: May 25, 2011