Ronald N. and Karen M. Gross - Page 11




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          injuries or sickness”.5  “The term ‘damages received (whether by               
          suit or agreement)’ means an amount received (other than                       
          workmen’s compensation) 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.                                              
               In order to exclude payments under section 104(a)(2)                      
          petitioner must show:  (1) The underlying cause of action giving               
          rise to the recovery is based upon tort or tort type rights, and               
          (2) the damages were received on account of personal injuries or               
          sickness.  See Commissioner v. Schleier, supra at 337; Mayberry                
          v. United States, supra at 858; Bagley v. Commissioner, 105 T.C.               
          396, 416 (1995), affd. 121 F.3d 393 (8th Cir. 1997).                           
               The tax consequences of payments made pursuant to a                       
          settlement agreement depend on the nature of the claims that were              
          the actual basis for settlement, not on the validity of those                  
          claims.  See Bagley v. Commissioner, supra at 406; Threlkeld v.                
          Commissioner, 87 T.C. 1294, 1297 (1986), affd. 848 F.2d 81 (6th                
          Cir. 1988); Bent v. Commissioner, 87 T.C. 236, 244 (1986), affd.               
          835 F.2d 67 (3d Cir. 1987); Seay v. Commissioner, 58 T.C. 32, 36-              


               5The Small Business Job Protection Act of 1996, Pub. L. 104-              
          188, sec. 1605(a), 110 Stat. 1755, 1838, amended sec. 104(a)(2)                
          to narrow the exclusion for personal injury damages received                   
          after Aug. 20, 1996, in tax years ending after that date.  Under               
          the amendment, personal injury or sickness must be physical.  The              
          amendment, however, does not apply to the years before us in this              
          case and, therefore, has no bearing on our decision.                           





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