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mere fact that petitioner’s underlying cause of action against
USI was based on the tort of fraudulent inducement does not in
and of itself satisfy the independent requirement that
petitioners must show that the damages received were on account
of personal injuries or sickness.
The Court of Appeals in Fabry v. Commissioner, 223 F.3d at
1270, concluded, on the basis of its review of relevant Supreme
Court and other judicial precedents, that to qualify for the
exclusion under section 104(a)(2), “a cause and effect
relationship must be established between the tort, the personal
injury resulting, and the amount received in settlement.” Thus,
in a nonphysical personal injury case:
each element of the tort settlement must be examined to
determine whether there is a direct causal link between
such element and an intangible element of the injury
(i.e., emotional distress, pain and suffering, loss of
reputation, etc.). If such a link is found, it would
seem to satisfy Schleier and payments received for such
damage, including losses of earning capacity and the
like, would be excludable. [Id.; emphasis added.]
In a footnote, the Court of Appeals observed that the
Supreme Court in Schleier, in requiring such a causal analysis,
“did not explain exactly what the link was nor how close the link
must be for a recovery to qualify for a IRC sec. 104(a)(2)
exclusion.” Id. at 1266 n.16. The Court of Appeals noted,
however, that in holding that damages received in settlement of
an age discrimination claim under the Age Discrimination in
Employment Act of 1967 were not excludable under section
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Last modified: May 25, 2011