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damages received if the underlying cause of action giving rise
to the recovery is based upon tort or tort type rights and the
damages are received on account of personal injuries or
sickness. See Commissioner v. Schleier, supra at 336-337.
Respondent concedes that Mr. Anderson’s claims sounded in tort,
thus satisfying the first prong of the Schleier test.
Therefore, we focus on the second prong of the test, which
requires petitioners to show that the damages received were on
account of personal injuries or sickness.
When damages are received pursuant to a suit or settlement
agreement, the nature of the underlying claim determines
whether such damages are excludable under section 104(a)(2).
See United States v. Burke, 504 U.S. 229, 239 (1992); see also
Metzger v. Commissioner, 88 T.C. 834, 847 (1987). For the
taxable years under consideration, personal injuries included
both physical and nonphysical injuries. See Commissioner v.
Schleier, supra at 329 n.4.
Petitioners argue that the damages they received for
tortious interference with business relationships were on
account of an injury to Mr. Anderson’s business reputation, a
personal injury, and, therefore, are excludable under section
104(a)(2).
The law is well settled that the tax consequences of an
award for damages depend upon the nature of the litigation and
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