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received from CMS during 1990 was not taxable because the $20,000
represented payment for:
[P]ersonal injuries sustained as a result of the
tortious conduct of * * * CMS * * * who knowingly
[made] false statements in writing to a U.S. Government
official for the purpose of obtaining U.S. Government
agency * * * [GNMA] approval of the purchase of a loan
servicing portfolio by CMS.
The Notice of Deficiency
In the notice of deficiency, respondent increased
petitioner's taxable income by $20,000, characterizing the
payment as "separation pay" and explaining:
It is determined * * * that the employment contract
separation pay of $20,000 which was included in your
Form W-2 from * * * [CMS] was not reported on your tax
return. Accordingly, taxable income is increased
$20,000 for 1990.
Controlling Legal Principles
Separation or severance pay, like other forms of
compensation for services, is generally includable in the income
of the recipient. Sec. 61(a)(1); Brennan v. Commissioner, T.C.
Memo. 1997-317; sec. 1.61-2(a)(1), Income Tax Regs. In general,
section 104(a)(2) excludes from gross income "the amount of any
damages received * * * on account of personal injuries". Only
damages that are received: (1) In connection with a claim based
upon a tort, or tort type right; and (2) on account of personal
injury or sickness, are excludable from the recipient's income.
Sec. 104(a)(2); Commissioner v. Schleier, 515 U.S. 323, 337
(1995).
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