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these damages are excludable from his gross income under section
104(a)(2). Petitioner asserts that he received the punitive
damages on account of his claim of conversion, which, he states,
is a tort under applicable State (South Carolina) law, and that
he received the punitive damages on account of a personal injury.
Petitioner asserts that South Carolina law provides that punitive
damages are compensatory in nature in that they reimburse a
plaintiff for personal injury. Respondent agrees with
petitioner's characterization of conversion as a tort under South
Carolina law but asserts that the punitive damages were not paid
to petitioner on account of a personal injury. Respondent
asserts that Academy paid the punitive damages to petitioner on
account of its reprehensible behavior.
We agree with respondent that the punitive damages are not
excludable from petitioner's gross income under section
104(a)(2). Section 104(a)(2) sets forth a narrowly construed
provision under which proceeds from a lawsuit are excluded from
gross income to the extent: (1) The cause of action underlying
the recovery of the proceeds is based upon tort or tort type
rights, and (2) the proceeds are received on account of a
personal injury or sickness.1 That section is inapplicable when
1 Sec. 7641(a) of the Omnibus Budget
Reconciliation Act of 1989, Pub. L. 101-239, 103 Stat.
2106, 2379, amended sec. 104(a)(2) to provide that the
personal injury exclusion contained therein does not
apply where the punitive damages are received in
connection with a case not involving physical injury
or physical sickness. This amendment does not apply
herein. Id. (amendment inapplicable to any lawsuit
filed before July 10, 1989).
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