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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
rights, and (2) the damages were received on account of personal
injuries or sickness. See Commissioner v. Schleier, 515 U.S.
323, 337 (1995).
The record in this case shows that petitioner’s dispute with
the district was over her dismissal for failure to comply with
the directives of her superiors. There is nothing in this record
that would indicate that the dispute involved a tortlike action
or a personal injury. As stated in the opinion of the secretary
of education:
The District’s dismissal action is based upon a
conclusion that Visco persistently and willfully
violated the school laws when she failed to comply with
requests made by the Principal, Assistant
Superintendent and Superintendent. As correctly
pointed out by Visco, the District’s action involves
three elements, all of which must be satisfied in order
for us to uphold the District’s action. The district
has the burden of proving by substantial evidence that
Visco’s actions were 1) persistent; 2) willful; and 3)
violations of school law. “Substantial evidence has
been defined as such relevant evidence as a reasonable
mind might accept as adequate to support a conclusion.”
* * *
Recovery of backpay in this context does not fall within the
exclusion of section 104(a)(2) because it does not satisfy the
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