Michael M. Brennan - Page 6

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          statement to his return, asserting that the ITO payment is                  
          excludable from gross income pursuant to section 104(a)(2) as a             
          payment received in exchange for the release and settlement of              
          tort-type rights.  Respondent determined that the ITO payment was           
          fully taxable severance pay.                                                
          Discussion                                                                  
               Except as otherwise provided, gross income includes income             
          from all sources.  Sec. 61(a); Commissioner v. Glenshaw Glass               
          Co., 348 U.S. 426 (1955).  While section 61(a) is to be broadly             
          construed, statutory exclusions from income are narrowly                    
          construed.  Commissioner v. Schleier, 515 U.S. 323,  327-328                
          (1995); Kovacs v. Commissioner, 100 T.C. 124, 128 (1993), affd.             
          without published opinion 25 F.3d 1048 (6th Cir. 1994).                     
               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           





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