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damages received on the fraud claim are excludable from income.”
Petitioners suggest that because petitioner successfully
prosecuted claims against USI for fraudulent inducement and
because such claims generally may encompass personal injuries,
any damages petitioner received necessarily must have been on
account of personal injuries.
In effect, then, petitioners would have us make an a priori
determination, seemingly without reference to empirical evidence,
that all damages awarded on petitioner’s fraudulent inducement
claim necessarily must have been received on account of personal
injuries. Petitioners suggest that the Court of Appeals’
decision in Fabry mandates this conclusion. For the reasons
discussed below, we disagree.
As the Court of Appeals discussed in Fabry, the Supreme
Court in Commissioner v. Schleier, 515 U.S. 323, 336 (1995),
found that before a recovery may be excluded under section
104(a)(2), a taxpayer must meet two “independent requirements”:
(1) The taxpayer must show that the underlying cause of action is
based upon “tort or tort type rights”; and (2) the taxpayer must
show that “the damages were received on account of personal
injuries or sickness.” If petitioners were correct in their
argument that personal injuries inhere in certain types of torts
(such as fraudulent inducement) so as to satisfy automatically
the conditions of section 104(a)(2), the result would be to
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