Norris O. and Betty J. Whitley - Page 1

                                 T.C. Memo. 1999-124                                  

                               UNITED STATES TAX COURT                                

           NORRIS O. AND BETTY J. WHITLEY, Petitioners v. COMMISSIONER OF             
                            INTERNAL REVENUE, Respondent                              

               Docket No. 12947-97.            Filed April 15, 1999.                  

                    P commenced a lawsuit in 1987, alleging that the                  
               defendant was liable to him for breach of contract and                 
               conversion.  As to the conversion claim, the jury                      
               awarded P actual and punitive damages.  P received the                 
               punitive damages in 1992.  P argues primarily that sec.                
               104(a)(2), I.R.C., excludes the punitive damages from                  
               his gross income because, he states, punitive damages                  
               are awarded under applicable State (South Carolina) law                
               as compensation for a personal injury.  P directs the                  
               Court to numerous cases where the South Carolina                       
               Supreme Court has stated that South Carolina law allows                
               an award of punitive damages to "vindicate a private                   
               right" and that this right is compensatory in nature.                  
                    Held:  The punitive damages are not excludable                    
               from P's gross income under sec. 104(a)(2), I.R.C.,                    
               because punitive damages are noncompensatory under                     
               applicable law.  Although the ultimate effect of a                     
               punitive damage award made under South Carolina law is                 
               compensatory in nature, such an award does not have a                  
               compensatory purpose in the sense of reimbursing the                   
               plaintiff for actual damages.                                          

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