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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:
(c) Damages received on account of personal
injuries or sickness. * * * 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; Wesson v. United States, 48
F.3d 894, 901-902 (5th Cir. 1995); Bagley v. Commissioner, 105
T.C. 396, 416 (1995).
Where damages are received pursuant to a settlement
agreement, as is the case herein,3 the nature of the claim that
was the actual basis for settlement controls whether such damages
3 In response to a concern of petitioners, we note that we
consider the release agreement to be a settlement or settlement
agreement. See, e.g., Black's Law Dictionary at 1372 (6th ed.
1990) (defining "settle" as "A word of equivocal meaning; meaning
different things in different connections, and the particular
sense in which it is used may be explained by the context or the
circumstances"). In any event, whatever the semantical
description of the release, the focus is on the actual terms of
the document.
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Last modified: May 25, 2011