- 9 -
construed. Commissioner v. Schleier, 515 U.S. ___, 115 S.Ct.
2159, 2163 (1995).
Under section 104(a)(2), gross income does not include "the
amount of any damages received (whether by suit or agreement and
whether as lump sums or as periodic payments) on account of
personal injuries or sickness". Section 1.104-1(c), Income Tax
Regs., provides "The term 'damages received (whether by suit or
agreement)' means an amount received * * * 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."
Thus, an amount may be excluded from gross income only when
it was received both: (1) Through prosecution or settlement of
an action based upon tort or tort type rights; and (2) on account
of personal injuries or sickness. Commissioner v. Schleier, 515
U.S. at ___, 115 S. Ct. at 2166-2167.
Where amounts are received pursuant to a settlement
agreement, the nature of the claim that was the actual basis for
settlement controls whether such amounts are excludable under
section 104(a)(2). United States v. Burke, 504 U.S. 229, 237
(1992); Robinson v. Commissioner, 102 T.C. 116, 126 (1994), affd.
in part, revd. in part 70 F.3d 34 (5th Cir. 1995). The "critical
question is, in lieu of what was the settlement amount paid?"
Bagley v. Commissioner, 105 T.C. 396, 406 (1995). Determination
of the nature of the claim is factual. The most important
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 Next
Last modified: May 25, 2011