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required to report the portion of the recovery paid to his
attorneys.
Section 104(a)(2)
Except as otherwise specifically provided, gross income
includes a taxpayer’s income from whatever source derived. See
sec. 61(a); see also Commissioner v. Glenshaw Glass Co., 348 U.S.
426 (1955). Section 61(a) is broadly construed, whereas specific
exclusions from gross income must be narrowly construed. See
Commissioner v. Schleier, 515 U.S. 323, 327-328 (1995). For
1994, section 104(a)(2) specifically excluded from gross income
“the amount of any damages received (whether by suit or agreement
and whether as lump sums or as periodic payments) on account of
personal injuries or sickness”. Section 1.104-1(c), Income Tax
Regs., provides that “damages received” is an amount received
(other than workmen’s compensation) through prosecution of an
action based upon tort or tort type rights.
When damages are received pursuant to a suit or settlement
agreement, the nature of the underlying claim determines whether
such damages are excludable under section 104(a)(2). See United
States v. Burke, 504 U.S. 229, 239 (1992); see also Metzger v.
Commissioner, 88 T.C. 834, 847 (1987), affd. without published
opinion 845 F.2d 1013 (3d Cir. 1988). “The critical question is,
in lieu of what was the settlement amount paid?” Bagley v.
Commissioner, 105 T.C. 396, 406 (1995), affd. 121 F.3d 393 (8th
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