Norris O. and Betty J. Whitley - Page 7

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               We disagree with petitioner's assertion that Academy paid              
          him the punitive damages on account of a personal injury.  The              
          award of punitive damages to him was not paid on account of a               
          personal injury to the extent that the damages are                          
          noncompensatory in nature.  See O'Gilvie v. United States, supra.           
          Whether the damages are noncompensatory in nature rests on                  
          applicable State law, see Bagley v. Commissioner, 105 T.C. 396,             
          417 (1995), affd. 121 F.3d 393 (8th Cir. 1997), which, in this              
          case, is the law of South Carolina.  Under South Carolina law, an           
          award of punitive damages is based upon the defendant's                     
          wrongdoing, rather than the extent of the plaintiff's injury; an            
          award of compensatory damages, on the other hand, is based upon             
          the extent of the plaintiff's injury, rather than the defendant's           
          wrongdoing.  See South Carolina Farm Bureau Mut. Ins. Co. v. Love           
          Chevrolet, Inc., 478 S.E.2d 57, 59 (S.C. 1996) (a claim for                 
          punitive damages may go to the jury only if "the defendant's                
          conduct rises to the level of culpability warranting a punitive             
          damage award"); Laird v. Nationwide Ins. Co., 134 S.E.2d 206, 210           
          (S.C. 1964) (quoting Bowers v. Charleston & W. C. Ry. Co., 42               
          S.E.2d 705 (S.C. 1947) ("compensatory damages are damages in                
          satisfaction of * * * loss or injury sustained.  Punitive damages           
          are allowed in the interest of society in the nature of                     
          punishment and as a warning and example to deter the wrongdoer              
          and others from committing like offenses in the future.")); see             
          also Clark v. Cantrell, 504 S.E.2d 605, 609 (S.C. Ct. App. 1998)            
          (punitive damages are not compensatory in nature under the law of           

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