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return explained that the amount was "excludable under Rev. Rul.
93-88 and code section 104(a)(2) as compensatory damages received
through settlement agreement in lieu of prosecution based upon
tort type rights and racial discrimination claims for disparate
treatment under Title VII." Respondent disallowed the $37,714
deduction claimed by petitioner.
OPINION
Except as otherwise provided, gross income includes income
from all sources. Sec. 61(a); Commissioner v. Glenshaw Glass
Co., 348 U.S. 426 (1955). Section 61(a), concerning inclusion of
income, has been broadly construed, and statutory exclusions from
income have been narrowly construed. Commissioner v. Schleier,
515 U.S. 323, 327-328 (1995); Kovacs v. Commissioner, 100 T.C.
124, 128 (1993), affd. without published opinion 25 F.3d 1048
(6th Cir. 1994).
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., in pertinent part, 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
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