-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,Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Next
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