Richard A. and Janice S. Adams - Page 4

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               Section 61(a) defines gross income broadly as "all income              
          from whatever source derived".  Gross income specifically                   
          includes compensation for services.  Sec. 61(a)(1).  Exclusions             
          from income are matters of legislative grace and are construed              
          narrowly.  Commissioner v. Schleier, 515 U.S. 323, 328 (1995);              
          Mostowy v. United States, 966 F.2d 668, 671 (Fed. Cir. 1992).  A            
          taxpayer seeking an exclusion from income must be able to point             
          to an applicable statute and show that he comes within its terms.           
               Section 104(a)(2) excludes from gross income "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".  The phrase "damages received" is further            
          defined as "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."  Sec. 1.104-1(c), Income Tax Regs.  Thus, to                  
          qualify for the exclusion, the taxpayer must satisfy a two-prong            
          test.  The taxpayer must show that (1) the cause of action giving           
          rise to the recovery is "based upon tort or tort type rights" and           
          (2) the damages were received "on account of personal injuries or           
          sickness."  Commissioner v. Schleier, supra at 337.  If a                   
          settlement is attributable to claims based on tort or tort type             
          rights as well as other rights, the taxpayer bears the burden of            
          establishing which portion of the settlement is attributable to             
          damages received based upon tort or tort type rights.  Similarly,           

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