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For purposes of applying the above statutory and regulatory
text, the U.S. Supreme Court in Commissioner v. Schleier, 515
U.S. 323, 336-337 (1995), established a two-pronged test for
ascertaining a taxpayer’s eligibility for the section 104(a)(2)
exclusion. As stated by the Supreme Court: “First, the taxpayer
must demonstrate that the underlying cause of action giving rise
to the recovery is ‘based upon tort or tort type rights’; and
second, the taxpayer must show that the damages were received ‘on
account of personal injuries or sickness.’” Id. at 337.
II. Contentions of the Parties
Petitioner contends that the payment she received from PSC
satisfies both prerequisites for excludability under section
104(a)(2). According to petitioner, at the time of her
termination she possessed a claim against PSC under Oklahoma law
for the tort of intentional infliction of emotional distress,
thereby meeting the requirement of an underlying claim based on
tort or tort type rights. Petitioner then maintains that because
PSC was aware of her complaints when the severance plan was
offered and executed, PSC intended by that vehicle to settle her
personal injury claims. Hence, in petitioner’s view, the subject
funds were received on account of her personal injuries.
Petitioner further argues that, since her only complaint against
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Last modified: May 25, 2011