- 9 - (c) Damages received on account of personal injuries or sickness. * * * 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. Thus, damages may be excluded from gross income if a two- prong test is satisfied. The taxpayer must show: (1) The underlying cause of action giving rise to the recovery is based on tort or tort type rights and (2) damages were received on account of personal injury or sickness. See Commissioner v. Schleier, supra at 336-337;5 Wesson v. United States, 48 F.3d 894, 901-902 (5th Cir. 1995); Bagley v. Commissioner, 105 T.C. 396, 416 (1995), affd. 121 F.3d 393 (8th Cir. 1997). These two independent requirements must both be satisfied in order for the exclusion under section 104(a)(2) to apply. Furthermore, the Schleier test has been divided into its disparate elements by some courts. Thus, the taxpayer must show: (1) There was an underlying claim sounding in tort; (2) the claim 5 In Commissioner v. Schleier, 515 U.S. 323, 336-337 (1995), the Supreme Court distinguished the recovery that a taxpayer receives as a result of an automobile accident from the recovery that a taxpayer receives as a result of age discrimination under the Age Discrimination in Employment Act of 1967 (ADEA), Pub. L. 90-202, 81 Stat. 602. Whereas both individuals may suffer emotional harm as a result of a defendant's wrongdoing, only the accident victim's recovery can be considered as received "on account of” personal injury because the ADEA does not provide recovery for personal injury. Therefore, the recovery received by the ADEA claimant is not on account of personal injury.Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Next
Last modified: May 25, 2011