George and Kathleen Knevelbaard, et al. - Page 21

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            delineated in the settlement agreement.  We agree with                                    
            petitioners.                                                                              
                  Section 61(a) provides a broad definition of "gross income":                        
            "Except as otherwise provided in this subtitle, gross income                              
            means all income from whatever source derived".  Thus,                                    
            petitioners' settlement proceeds constitute gross income unless                           
            expressly excepted by another provision in the Code.                                      
            Commissioner v. Schleier, 515 U.S. 323, 328 (1995).  Petitioners                          
            claim the settlement award falls within section 104(a)(2), which                          
            excludes from gross income "the amount of any damages received                            
            * * * on account of personal injuries or sickness".                                       
                  Section 1.104-1(c), Income Tax Regs., provides:                                     
                  Section 104(a)(2) excludes from gross income the amount                             
                  of any damages received (whether by suit or agreement)                              
                  on account of personal injuries or sickness.  The term                              
                  "damages received * * *" means an amount received                                   
                  (other than workmen's compensation) 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, petitioners must meet two independent requirements to                               
            exclude the recovery under section 104(a)(2):  First, they must                           
            demonstrate that the underlying cause of action giving rise to                            
            the recovery is based upon tort or tort type rights; and second,                          
            they must show that the damages were received on account of                               
            personal injuries or sickness.  Commissioner v. Schleier, supra                           
            at 337.                                                                                   






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