Ralph W. Emerson and Suzanne O. Emerson - Page 10

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          Settlement Proceeds                                                         
               Respondent determined that petitioners are not entitled to             
          exclude the settlement amount from income because it was not                
          received on account of any personal physical injury or physical             
          sickness.  Petitioners contend that the settlement payments are             
          excludable under section 104(a)(2) because they were received on            
          account of petitioner’s physical injury.  Specifically,                     
          petitioners argue that the “lawsuit was settled only after there            
          was a specific agreement to allow an amendment to petitioner’s              
          complaint to include a claim for physical injury, and that the              
          reason the case was able to settle was because a payment was                
          going to be made and received on that basis.”                               
               In this case, petitioners have neither argued that section             
          7491 is applicable to shift the burden of proof to respondent nor           
          established that they complied with the requirements of section             
          7491(a)(2)(A) and (B).  The resolution of this issue does not               
          depend on which party has the burden of proof.  We resolve this             
          issue on the preponderance of the evidence in the record.                   
               Section 61(a) includes in gross income "all income from                
          whatever source derived" unless otherwise provided.  Section                
          104(a)(2), however, 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           

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