- 15 -
lump sums or as periodic payments) on account of personal
injuries or sickness”.
The Secretary has interpreted “damages received” to mean
amounts received “through prosecution of a legal suit or action
based upon tort or tort type rights, or through a settlement
agreement entered into in lieu of such prosecution”. Sec. 1.104-
1(c), Income Tax Regs. Therefore, to exclude damages from gross
income pursuant to section 104(a)(2), the taxpayer must prove (1)
the underlying cause of action is based upon tort or tort type
rights; and (2) the damages received were on account of personal
injuries or sickness. See Commissioner v. Schleier, 515 U.S.
323, 337 (1995). The term “personal injuries” has been
interpreted as including nonphysical injuries such as those
affecting emotions, reputation, or character.10 See United
States v. Burke, 504 U.S. 229, 235 n.6 (1992). This Court has in
certain circumstances concluded that damages received on account
of harm to business reputation were received on account of
personal injuries. See, e.g., Threlkeld v. Commissioner, 87 T.C.
1294, 1308 (1986), affd. 848 F.2d 81 (6th Cir. 1988).
In evaluating whether amounts received pursuant to a
10 Congress amended sec. 104(a)(2) in The Small Business
Job Protection Act of 1996, Pub. L. 104-188, sec. 1605(a), 110
Stat. 1755, 1838, by limiting the exclusion, inter alia, to
“personal physical injuries or physical sickness”. The amendment
does not apply to the year before us and has no bearing on the
instant case.
Page: Previous 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 NextLast modified: May 25, 2011