Ralph W. Emerson and Suzanne O. Emerson - Page 11

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          account of personal physical injuries or physical sickness”.                
          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, 515 U.S. 323, 336-337 (1995); sec. 1.104-1(c), Income             
          Tax Regs.  Damages are not excludable from gross income under               
          section 104(a)(2) if the damages are received pursuant to the               
          settlement of economic rights arising out of a contract.  See               
          Robinson v. Commissioner, 102 T.C. 116, 126 (1994), affd. in                
          part, revd. in part on another ground 70 F.3d 34 (5th Cir. 1995);           
          see also Fono v. Commissioner, 79 T.C. 680, 692 (1982), affd.               
          without published opinion 749 F.2d 37 (9th Cir. 1984).                      
               If damages are received pursuant to a settlement agreement,            
          the nature of the claim that was the actual basis for settlement,           
          rather than the validity of the claim, determines whether the               
          damages were received on account of tortlike personal injuries.             
          See Robinson v. Commissioner, supra at 126.  The determination of           
          the nature of the claim is made by reference to the settlement              
          agreement in light of the surrounding circumstances.  Id.  A key            
          question to ask is:  “In lieu of what were the damages awarded?”            
          Id. (quoting Raytheon Prod. Corp. v. Commissioner, 144 F.2d 110,            
          113 (1st Cir. 1944), affg. 1 T.C. 952 (1943)).  If the settlement           
          agreement does not expressly allocate the settlement between                

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