Madeline A. Coblenz and William J. Mason - Page 15

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          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.                                                               

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