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consequential damages (e.g., a ruined credit rating)", the
Supreme Court has distinguished such personal injuries from
"legal injuries of an economic character" such as those arising
out of the unlawful deprivation of the opportunity to earn wages
through a wrongful termination. United States v. Burke, 504 U.S.
229, 239, 245 (1992). Damages received for lost wages in
connection with the settlement of economic rights, such as those
arising out of a breach of contract, are not excludable from
income under section 104(a)(2). See Robinson v. Commissioner,
102 T.C. 116, 126 (1994), affd. in part, revd. in part on another
issue 70 F.3d 34 (5th Cir. 1995).
Section 1.104-1(c), Income Tax Regs., provides: "The term
'damages received (whether by suit or agreement)' means an amount
received * * * 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." Thus, in
order to exclude damages from gross income pursuant to section
104(a)(2), the taxpayer must prove: (1) The underlying cause of
action 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 336-337.
Where amounts are received pursuant to a settlement
agreement, the nature of the claim that was the actual basis for
settlement controls whether such amounts are excludable from
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