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petitioners' invitation to shift the burden of proof in this case
to respondent.
II. Excludability of Settlement Proceeds Under Section 104(a)(2)
Except as otherwise provided, gross income includes income
from all sources. Sec. 61. In this regard, statutory exclusions
from income must be narrowly construed. Commissioner v.
Schleier, 515 U.S. 232, 115 S. Ct. 2159, 2163 (1995).
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 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." Thus, an amount may be excluded from gross income
only when it was received both: (1) Through prosecution or
settlement of an action based upon tort or tort type rights and
(2) on account of personal injuries or sickness. Sec. 104(a)(2);
O'Gilvie v. United States, 519 U.S. ___, 117 S. Ct. 452, 454
(1996); Commissioner v. Schleier, 515 U.S. at __, 115 S. Ct. at
2164; P & X Mkts., Inc. v. Commissioner, 106 T.C. 441, 443-444
(1996); sec. 1.104-1(c), Income Tax Regs.
Petitioners contend that $800,000 is excludable from gross
income under section 104(a)(2) because the settlement agreement
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