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that the scope of excludable damages is limited to those
received through prosecution of an action based upon tort
or tortlike rights:
The term "damages received (whether by suit or
agreement)" 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 such prosecution. [Sec. 1.104-
1(c), Income Tax Regs.]
After reviewing section 104(a)(2) and the above regulation,
the U.S. Supreme Court stated that a taxpayer must meet the
following two independent requirements before a recovery
may be excluded under section 104(a)(2):
First, the taxpayer must demonstrate that the
underlying cause of action giving rise to the
recovery is "based upon tort or tort type
rights"; and second, the taxpayer must show that
the damages were received "on account of personal
injuries or sickness." * * * [Commissioner v.
Schleier, 515 U.S. 323, 337 (1995).]
Petitioners acknowledge that the damages of $300,000
awarded by the jury were based entirely on petitioner's
claim for breach of a covenant of good faith and fair
dealing and that the amount paid by Thrifty included
interest of $14,173.91. Petitioners' brief states:
On May 23, 1994, the jury returned a verdict for
Petitioner on the Second Cause of Action, Breach
of the Covenant of Good Faith and Fair Dealing in
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