- 16 -
suit or agreement and whether as lump sums or as
periodic payments) on account of personal injuries or
sickness;
The regulations under section 104 provide that the term
“damages received (whether by suit or agreement)” means “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.” Sec. 1.104-1(c), Income Tax Regs.
In Commissioner v. Schleier, supra, the U.S. Supreme Court
established a two-prong test for determining whether a taxpayer
is eligible to exclude income under section 104(a)(2). The
taxpayer must demonstrate (1) that the underlying cause of action
giving rise to recovery is based upon tort or tort-type rights
and (2) that the damages were received on account of personal
injuries or sickness. See Commissioner v. Schleier, supra at
336-337.
B. Contentions of the Parties
Petitioner contends that the $116,000 payment he received
from Winston was a result of arm’s-length negotiations resulting
in a settlement solely for his release of an IIED claim.
Respondent contends that the $116,000 settlement payment was a
portion of a severance payment, and not consideration for a
release of a specific IIED claim.
Page: Previous 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 NextLast modified: May 25, 2011