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(holding that compensatory damages received for malicious
prosecution, including compensation for injuries to professional
reputation, were excludable under section 104(a)(2)); Gross v.
Commissioner, T.C. Memo. 2000-342 (holding that lump-sum
settlement payment covering claim for defamation was excludable
under section 104(a)(2)); Burditt v. Commissioner, supra (holding
that settlement proceeds paid to settle a claim for mental
anguish were excludable under section 104(a)(2)); Noel v.
Commissioner, T.C. Memo. 1997-113 (holding that settlement
proceeds attributable to a claim for tortious interference with
contractual rights and prospective business advantages were
excludable under section 104(a)(2)).
For the reasons described below, however, we are unpersuaded
that Katherine and Damian received the settlement payments
exclusively on account of personal injuries or sickness.
2. Katherine’s Claims for Economic Injuries
On or about June 30, 1993, immediately after Maritz Inc.
terminated Katherine’s employment, Suelthaus met with Backerman
and asserted a claim for severance benefits on Katherine’s
behalf. About 2 weeks later, the Hobler family, through one of
their newly elected Maritz Inc. board members, introduced a
resolution to reinstate Katherine in her former position and to
compensate her for lost wages and benefits, as well as “for any
emotional and/or physical damages she may have suffered” as a
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