-6-
settlement language to the contrary was a “naked attempt” to
qualify under section 104(a)(2) and therefore should be
disregarded.
Discussion
Section 61 provides that all income from whatever source
derived is included in gross income, except as otherwise
provided. This definition of gross income is broadly construed.
See Commissioner v. Schleier, 515 U.S. 323, 327-328 (1995).
Accordingly, any statutory exclusions from income must be
narrowly construed. Id.
One such exclusion, provided for in section 104(a)(2), is
that “damages [received] (whether by suit or agreement and
whether as lump sums or periodic payments) are excluded from
gross income if those damages were received on account of
personal injuries or sickness”. However, two requirements must
be met. Commissioner v. Schleier, supra at 337; sec. 1.104-1(c),
Income Tax Regs. First, the claims from which the lawsuit arose
and upon which it settled, must be “based upon tort or tort type
rights.” Commissioner v. Schleier, supra at 337. Second, the
damages must have been received “on account of personal injuries
or sickness.” Id. For the exclusion to apply, both requirements
must be satisfied.4 Id.; Jacobs v. Commissioner, T.C. Memo.
4 It must be noted here that a “personal injury” is
different from an “economic injury”. A personal injury includes
nonphysical injuries such as those affecting emotions,
reputation, or character. United States v. Burke, 504 U.S. 229,
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