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Discussion
Except as otherwise provided, gross income includes income
from all sources. Sec. 61; Commissioner v. Glenshaw Glass Co.,
348 U.S. 426 (1955). While section 61(a) is to be broadly
construed, statutory exclusions from income must be narrowly
construed. Commissioner v. Schleier, 515 U.S. ___, 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. Commissioner v.
Schleier, 515 U.S. at ___, 115 S. Ct. at 2166-2167.
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); Robinson v. Commissioner, 102 T.C. 116, 126 (1994), affd.
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Last modified: May 25, 2011