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settlement award of $30,599 is excludable from income under
section 104(a)(2).
Section 61 broadly defines gross income to include all
income from whatever source derived, except as otherwise
provided. Statutory exclusions from income are narrowly
construed. Commissioner v. Schleier, 515 U.S. 323, 328 (1995).
Section 104(a)(2) provides that gross income does not
include “the amount of any damages received (whether by suit or
by agreement * * * ) on account of personal injuries or
sickness”. Section 1.104-1(c), Income Tax Regs., provides that
the term “damages received” “means an amount received (other than
workmen’s compensation) 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 prosecution.”
Petitioner’s settlement proceeds may be excluded from gross
income only if she shows: (1) The underlying cause of action
giving rise to the recovery is based upon tort or tort type
rights and (2) the damages were received on account of personal
injuries or sickness. Commissioner v. Schleier, supra at 337.
The first part of the test “examines the legal basis of the
claim for tort-like characteristics, focusing on the scope of
remedies available under the statutory scheme.” Dotson v. United
States, 87 F.3d 682, 685 (5th Cir. 1996); see also Brennan v.
Commissioner, T.C. Memo. 1997-317. The second requirement “tests
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