Tonia V. Cates - Page 5




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          Co., 348 U.S. 426, 429 (1955) (quoting Helvering v. Clifford, 309           
          U.S. 331, 334 (1940)).  Statutory exceptions from income are                
          narrowly construed.  Commissioner v. Schleier, 515 U.S. 323, 328            
          (1995).                                                                     
               Section 104(a)(2) excludes from gross income “the amount of            
          any damages (other than punitive damages) received (whether by              
          suit or agreement and whether as lump sums or as periodic                   
          payments) on account of personal physical injuries or physical              
          sickness”.  Section 1.104-1(c), Income Tax Regs., defines                   
          “damages received” as “an amount received (other than workmen’s             
          compensation) through prosecution of a legal suit or action based           
          upon tort or tort type rights, or through a settlement agreement            
          entered into in lieu of such prosecution.”  Amounts are                     
          excludable from gross income only when (1) the underlying cause             
          of action giving rise to the recovery is based on tort or tort              
          type rights, and (2) the damages were received on account of                
          personal injuries or sickness.  Commissioner v. Schleier, supra             
          at 337.                                                                     
               Where amounts are received pursuant to a settlement                    
          agreement, the nature of the claim that was the actual basis for            
          settlement controls whether such amounts are excludable under               
          section 104(a)(2).  United States v. Burke, 504 U.S. 229, 237               
          (1992).  Determination of the nature of the claim is a factual              








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