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not be treated as a physical injury or physical sickness” for
purposes of section 104(a)(2) (except for damages not in excess
of the amount paid for medical care attributable to emotional
distress). Prasil v. Commissioner, T.C. Memo. 2003-100.
According to the legislative history of section 104(a)(2), “the
term emotional distress includes symptoms (e.g., insomnia,
headaches, stomach disorders) which may result from such
emotional distress.” H. Conf. Rept. 104-737, at 301 n.56 (1996),
1996-3 C.B. 741, 1041 n.56.
Generally, damages are excludable from gross income if they
satisfy two requirements. The Supreme Court in Commissioner v.
Schleier, 515 U.S. 323, 336 (1995), established those
requirements as:
First, the taxpayer must demonstrate that the
underlying cause of action giving rise to the recovery
is ‘based upon tort or tort type rights’; and second,
the taxpayer must show that the damages were received
‘on account of personal injuries or sickness.’ * * *
The U.S. Court of Appeals for the Ninth Circuit, the court
to which this case is appealable, held prior to the amendment of
section 104(a)(2) that defamation may be considered a personal
injury for purposes of section 104(a)(2). Roemer v.
Commissioner, 716 F.2d 693 (9th Cir. 1983), revg. 79 T.C. 398
(1982). However, the amendment to section 104(a)(2), which does
not otherwise change the section 104(a)(2) analysis set forth in
Schleier, now requires that the payments be “on account of
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