James J. and Linda J. Harford - Page 7

                                        - 7 -                                         

          U.S. 426, 429-430 (1955).  Although section 61(a) is to be                  
          broadly construed, statutory exclusions from income must be                 
          narrowly construed.  Commissioner v. Schleier, 515 U.S. 323, 327-           
          328 (1995).                                                                 
               Section 104(a)(2) excludes from gross income "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, in order to exclude damages from gross                 
          income pursuant to section 104(a)(2), the taxpayer must prove:              
          (1) The underlying cause of action is "based upon tort or tort              
          type rights", and (2) the damages were received "on account of              
          personal injuries or sickness."  Commissioner v. Schleier, supra            
          at 336-337.                                                                 
               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 from                
          gross income under section 104(a)(2).  United States v. Burke,              
          504 U.S. 229, 237 (1992).  The crucial question is "in lieu of              
          what was the settlement amount paid."  Bagley v. Commissioner,              





Page:  Previous  1  2  3  4  5  6  7  8  9  10  11  Next

Last modified: May 25, 2011