- 7 -
personal injuries or sickness". Section 1.104-1(c), Income Tax
Regs., provides that "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." In order for damages to be excludable from gross
income under section 104(a)(2), the taxpayer must demonstrate
that: (1) The underlying cause of action is based upon tort or
tort type rights, and (2) the damages were received on account of
personal injuries or sickness. Commissioner v. Schleier, 515
U.S. at ___, 115 S. Ct. at 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). The critical question is "in lieu of what was the
settlement amount paid?" Bagley v. Commissioner, 105 T.C. 396,
406 (1995).
The amount received by petitioner pursuant to the settlement
agreement in the case against State Farm was intended to settle
petitioner's claims under title VII of the CRA of 1964.
Petitioner did not file an individual complaint in that case, and
the settlement agreement does not contain a specific reference to
title VII. Nevertheless, the surrounding circumstances confirm
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 Next
Last modified: May 25, 2011