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of $76,739 based on years of service and salary. APC reported
the payment as taxable income to petitioner and withheld Federal
income taxes.
On his 1995 Federal income tax return, petitioner excluded
the severance pay from his taxable income, but disclosed his
position that the payment was not taxable because he believed it
was based upon tort or tort type rights.
OPINION
Except as otherwise provided, gross income includes income
from all sources. See Sec. 61(a); Glenshaw Glass Co. v.
Commissioner, 348 U.S. 426 (1955). Section 104(a)(2) excludes
from gross income “the amount of any damages received (whether by
suit or agreement and whether as lump sums or as periodic
payments) on account of personal injuries or sickness”. Under
the applicable regulations, “the term ‘damages received (whether
by suit or agreement)’ means an amount 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.
For damages to be excludable under section 104(a)(2), a taxpayer
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
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