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II. Were the Payments Received on Account of Personal Injuries
or Sickness?
The second prong of the Schleier test requires a taxpayer to
show that the payments were received on account of personal
injuries or sickness. See sec. 104(a)(2); Commissioner v.
Schleier, 515 U.S. at 337. In order to satisfy Schleier, a
causal connection must be established between the tort, the
personal injury resulting, and the amount received in settlement.
See O’Gilvie v. United States, 519 U.S. 79, 82-83 (1996);
Commissioner v. Schleier, supra at 329-331. Each element of the
tort settlement must be examined to determine whether there is a
direct causal link between that element and the personal injury
or sickness. See Commissioner v. Schleier, supra at 330.
A. Severance Payments
Petitioners assert that they erroneously included the
severance payments in their gross income and that, as a result,
they have overpaid their Federal income taxes for 1993 and 1994
and are entitled to a refund. We disagree.
Generally, severance pay, like the pay it replaces, is
includable in income. See sec. 61(a)(1); Lubart v. Commissioner,
154 F.3d 539 (5th Cir. 1998), affg. T.C. Memo. 1997-343; Keel v.
Commissioner, T.C. Memo. 1997-278; sec. 1.61-2(a)(1), Income Tax
Regs. Where, as here, the settlement agreement lacks express
language stating that the payment was (or was not) made on
account of personal injury, the most important factor in
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