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T.C. Memo. 1990-310. Respondent’s determination with respect to
this issue is sustained.
2. Lawsuit Settlement
In 1994, petitioner filed a complaint in the United States
District Court for the Eastern District of Pennsylvania against
the Wilmington Trust Company and other parties for breach of
contract, breach of the implied covenant of good faith and fair
dealing, defamation due to reporting a charge-off to a credit
reporting service, fraud, and the intentional infliction of
emotional distress. Pursuant to a settlement of the lawsuit
petitioner received $1,500 in 1998. The parties’ basis for
settlement is not set forth in the settlement document.
Respondent determined in the notice of deficiency that the
payment received in settlement of the lawsuit was includable in
petitioner’s income.
Gross income does not include the amount of any damages
(other than punitive damages) received, whether by suit or
agreement, and whether as lump sums or periodic payments, on
account of personal physical injuries or physical sickness. Sec.
104(a)(2).4 For purposes of paragraph (2), emotional distress
4 Prior to the amendment of sec. 104(a)(2) by the Small
Business Job Protection Act of 1996, Pub. L. 104-188, sec.
1605(a), 110 Stat. 1838-1839, effective for amounts received
after Aug. 20, 1996, gross income did not include damages
received on account of personal injuries or sickness. Personal
injuries included nonphysical injuries. Commissioner v.
Schleier, 515 U.S. 323, 329 n.4 (1995) (citing United States v.
Burke, 504 U.S. 229, 235 n.6 (1992)).
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