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and any statutory exclusions from income must be narrowly
construed. See Commissioner v. Schleier, 515 U.S. 323, 327-328
(1995). Section 104(a)(2) provides an exclusion for “any damages
received (whether by suit or agreement and whether as lump sums
or as periodic payments) on account of personal injuries or
sickness”.
To be excludable under section 104(a)(2), payments received
in settlement must be (1) received “on account of personal
injuries or sickness” and (2) received for claims “based upon
tort or tort type rights”. Commissioner v. Schleier, supra at
333; sec. 1.104-1(c), Income Tax Regs. Both of these
requirements must be satisfied in order for the exclusion to
apply. See Commissioner v. Schleier, supra.
The term “personal injuries” has been interpreted as
including nonphysical injuries such as those affecting emotions,
reputation, or character.1 United States v. Burke, 504 U.S. 229,
235 n.6 (1992). Personal injuries are distinguished from “legal
injuries of an economic character” such as those arising out of
the unlawful deprivation of full wages earned for services
performed or the unlawful deprivation of the opportunity to earn
wages through wrongful termination. Id. at 239.
1 The Small Business Job Protection Act of 1996, Pub. L.
104-188, sec. 1605(a), 110 Stat. 1755, 1838, amended sec.
104(a)(2) to limit the exclusion to “personal physical injuries
or physical sickness”. The amendment does not apply to 1995 and
thus has no bearing on the case herein.
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