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PayLess’ refusal to compensate them for overtime work.
We are unpersuaded by the language in the settlement
agreement indicating that the lawsuit giving rise to the
settlement was “not fully plead [sic]”. Petitioners presented no
evidence that petitioner suffered personal injury or sickness as
a result of his employment with PayLess. Petitioner Shauna Lee
Nelson testified: “I think PayLess realized that they could have
been held liable for * * * many things, including discrimination
and, you know, alienation of affections”. Petitioners also point
to the broad language in the settlement agreement releasing
PayLess from all claims that could have been pled in the lawsuit.
There must be a direct link, however, between the personal injury
or sickness and the recovery of damages for the section 104(a)(2)
exclusion to apply. See Commissioner v. Schleier, 515 U.S. 323,
330 (1995). The language contained in the settlement agreement
is insufficient to establish a link between the settlement
agreement and any personal injuries.
We thus find that petitioner’s settlement proceeds of back
wages and liquidated damages were not received on account of
personal injury and therefore do not qualify for exclusion under
section 104(a)(2).
Petitioners must also include in their gross income the
portion of petitioner’s settlement proceeds retained by the
attorneys representing the plaintiffs in the underlying action.
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