David Stevan and Karen Ann Brandriet - Page 4




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          income tax return.                                                          
                                       OPINION                                        
          Issue 1.  Whether the Punitive Damages Are Includable in                    
                    Petitioners' Gross Income                                         
               Respondent determined that the punitive damages received by            
          petitioners are taxable.  Petitioners contend that the punitive             
          damages portion of their award is excludable from gross income              
          pursuant to section 104(a)(2), because their lawsuit was based              
          upon tort or tort type rights and the jury "awarded damages it              
          believed would compensate their civil injuries."                            
               Not Compensatory                                                       
               Section 104(a)(2) provides that gross income does not                  
          include "the amount of any damages received * * * on account of             
          personal injuries or sickness".  An award of punitive damages is            
          not paid on account of a personal injury to the extent that the             
          damages are noncompensatory.  See O'Gilvie v. United States, 519            
          U.S. 79 (1996).  Whether damages are noncompensatory rests upon             
          applicable State law.  See Bagley v. Commissioner, 105 T.C. 396,            
          417 (1995), affd. 121 F.3d 393 (8th Cir. 1997).                             
               The present case involves South Dakota law.  See Brandriet             
          v. Norwest Bank S.D., N.A., supra at 616, 618.  In Hulstein v.              
          Meilman Food Indus., Inc., 293 N.W.2d 889, 891, 892 (S.D. 1980),            
          the South Dakota Supreme Court stated that, while the "sole                 
          object of compensatory damages is to make the injured party                 
          whole", the "purpose of awarding punitive damages is to punish              





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