Neil D. and Vy Lubart - Page 6

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               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 action based upon tort or tortlike rights; and (2) on account            
          of personal injuries or sickness.  Commissioner v. Schleier,                
          supra; Wesson v. United States, 48 F.3d 894, 901-902 (5th Cir.              
          1995); Bagley v. Commissioner, 105 T.C. 396, 416 (1995).                    
               Where damages are received pursuant to a settlement                    
          agreement, the nature of the claim that was the actual basis for            
          settlement controls whether such damages are excludable under               
          section 104(a)(2).  United States v. Burke, 504 U.S. 229, 237               
          (1992); Thompson v. Commissioner, 866 F.2d 709, 711 (4th Cir.               
          1989), affg. 89 T.C. 632 (1987); Robinson v. Commissioner, 102              
          T.C. 116, 126 (1994), affd. in part and revd. in part 70 F.3d 34            
          (5th Cir. 1995).  "[T]he critical question is, in lieu of what              

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