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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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