Brian David Nelson and Shauna Lee Nelson - Page 7




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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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