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Petitioners did not report the $350,000 received from CWRU
on their 1994 Form 1040, U.S. Individual Income Tax Return.
OPINION
The issue is whether the $350,000 payment received by
petitioners from CWRU in 1994 is excludable from gross income
under section 104(a)(2).3 Petitioners argue that the $350,000
payment from CWRU is from a tort-based suit and represents
nontaxable compensation for personal injuries under section
104(a)(2).
Gross income includes income from whatever source derived.
See sec. 61(a). Gross income does not include the amount of any
damages received on account of personal injuries or sickness.
See sec. 104(a)(2). “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. In order for
damages to be excludable from gross income under section
104(a)(2), the taxpayer must demonstrate that: (1) The
underlying cause of action is based upon tort or tort type
3The Small Business Job Protection Act of 1996, Pub. L. 104-
188, sec. 1605(a), 110 Stat. 1838, amended sec. 104(a)(2) to
limit the exclusion, inter alia, to "personal physical injuries
or physical sickness". The amendment does not apply to damages
collected before the date of its enactment and has no bearing
here.
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