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Pursuant to section 104(a)(2), gross income does not include
“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”. The applicable regulations provide
that “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. A tort is a “‘civil wrong, other
than breach of contract, for which the court will provide a remedy
in the form of an action for damages.’” United States v. Burke, 504
U.S. 229, 234 (1992)(quoting Keeton et al., Prosser and Keeton on
the Law of Torts 2 (5th ed. 1984)). The availability of
compensatory remedies is critical, see Commissioner v. Schleier,
supra at 333, and such remedies are intended to redress intangible
elements of injury deemed important (even though not pecuniary in
their consequences), including emotional distress, pain and
suffering, impairment of reputation, personal humiliation, and
mental anguish. See, e.g., United States v. Burke, supra at 235-
236. Thus, in order to exclude damages from gross income pursuant
to section 104(a)(2), a taxpayer must prove: (1) The underlying
cause of action 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 336-337; Rozpad v.
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