- 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 Next
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