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(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.
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