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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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