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and whether as lump sums or as periodic payments) on account of
personal injuries or sickness”. Section 104(a) further states
that section 104(a)(2) “shall not apply to any punitive damages
in connection with a case not involving physical injury or
physical sickness.”
We first consider whether the payments petitioners
received as settlement for liquidated damages in the Kinnett
litigation settlement are excludable from their 1994 taxable
income pursuant to section 104(a)(2) as damages received on
account of personal injuries or sickness.
Section 61 includes in gross income all income from
whatever source derived. This section is broadly constructed,
and any statutory exclusions from income must be narrowly
construed. See Commissioner v. Schleier, 515 U.S. 323, 328
(1995). Section 104(a)(2) provides an exclusion for damages
paid as compensation for personal injuries or sickness. If the
damages are paid in settlement, the amount is excludable only
if (1) it is received “on account of personal injuries or
sickness”, and (2) it is received for claims “based upon tort
or tort type rights”. See Commissioner v. Schleier, supra at
333.
Where damages are received pursuant to a settlement
agreement, as here, the nature of the claim that was the basis
for settlement controls whether such damages are excludable
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