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amount paid under the settlement directly to petitioner’s
attorney is excludable from petitioner’s gross income; and (3)
whether any portion of the tax burden placed on petitioner’s
settlement proceeds violates his constitutional rights as a
taking without due process of law or just compensation within the
meaning of the Fifth Amendment of the U.S. Constitution.
I. Exclusion for Damages
Section 61 defines gross income as “all income from whatever
source derived”. While this definition of gross income is broad
in terms of what it includes, exclusions from gross income are
narrowly construed. United States v. Burke, 504 U.S. 229, 248
(1992). One such exclusion is provided for in section 104(a)(2):
“damages received (whether by suit or agreement and whether as
lump sums or as periodic payments) on account of personal
injuries or sickness” are excluded from gross income.
A. Economic Damages
Petitioner received $646,389 in economic damages.
Petitioner contends that section 104(a)(2) applies to exclude
these economic damages from gross income. In arguing that these
proceeds are excludable, petitioner points out that under Oregon
State law, his claims against BCal and MBL for wrongful discharge
and intentional interference with economic expectations are
torts. As such, petitioner claims that damages received in
connection with these torts are excludable under section
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Last modified: May 25, 2011