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shall not be treated as a physical injury or physical sickness,
except to the extent of any damages not in excess of the amount
paid for medical care attributable to the emotional distress.
Sec. 104(a). Damages received that are excludable from gross
income include an amount received through a settlement agreement
entered into in lieu of prosecution of a legal suit or action
based upon tort or tort type rights. Sec. 1.104-1(c), Income Tax
Regs.
While the defamation and emotional distress causes of action
alleged in the lawsuit complaint are injuries personal to
petitioner, see, e.g., Threlkeld v. Commissioner, 87 T.C. 1294,
1299 (1986), affd. 848 F.2d 81 (6th Cir. 1988); Freeman v.
Commissioner, T.C. Memo. 2001-254 (breaching implied covenant of
good faith is not a personal injury), we are unable to find that
any portion of the settlement was paid to petitioner as
compensation for physical injury or physical sickness. The
settlement document pursuant to which the lawsuit was settled
does not provide the basis for the parties’ settlement.
Petitioner has not argued that she received the $1,500 settlement
on account of a physical injury or physical sickness. Sec.
104(a)(2). We conclude that section 104(a)(2) is not applicable
to exclude the $1,500 payment received from gross income because
petitioner did not receive the settlement on account of a
physical injury or physical sickness. Respondent is sustained
with respect to this issue.
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