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As an exception to the general rule under section 61(a),
section 104(a)(2) provides that gross income does not include
"the amount of any damages received (whether by suit or agreement
* * *) on account of personal injuries or sickness". Section
1.104-1(c), Income Tax Regs., provides in pertinent part:
(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.
An amount may be excluded from gross income only if it is
received both: (1) Through prosecution or settlement of an action
based upon tort or tort-type rights; and (2) on account
ofpersonal 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), affd.
121 F.3d 393 (8th Cir. 1997).
2. Personal Injury
Personal injury need not be purely physical in nature and
may include nonphysical emotional injury. United States v.
Burke, supra; Threlkeld v. Commissioner, 87 T.C. 1294 (1986),
affd. 848 F.2d 81 (6th Cir. 1988). In United States v. Burke,
supra at 239, the Supreme Court described the traditional harms
associated with personal injury as "pain and suffering, emotional
distress, harm to reputation, or other consequential damages
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