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188, sec. 1605, 110 Stat. 1755, 1838-1839, is unconstitutional.
Prior to its amendment in 1996, section 104(a)(2) served to
exclude from gross income “the amount of any damages received
(whether by suit or agreement and whether as lump sums or as
periodic payments) on account of personal injuries or sickness”.
Thus, the 1996 amendment narrowed the exclusion to require that
the personal injury or sickness must be physical in nature. In
addition, the amendment explicitly excepts punitive damages from
the exclusion. See H. Conf. Rept. 104-737, at 300-302 (1996),
1996-3 C.B. 741, 1040-1042. As amended, sec. 104(a)(2) is
generally applicable to amounts received after August 20, 1996;
i.e., the date of enactment of the Small Business Job Protection
Act of 1996, Pub. L. 104-188, sec. 1605(d)(1), 110 Stat. 1839.
Petitioner contends that the distinction between personal
physical injury or sickness (i.e., section 104(a)(2) after the
1996 amendment) and nonphysical personal injury or sickness
(i.e., section 104(a)(2) before the 1996 amendment) is
unconstitutional.5 We disagree.
Tax legislation carries a “presumption of
constitutionality”, Regan v. Taxation With Representation, 461
5 Implicit in petitioner’s contention is the assumption
that petitioner’s $20,000 payment would be excludable from income
pursuant to sec. 104(a)(2) prior to its amendment. We think this
assumption is highly questionable under the two-prong standard of
Commissioner v. Schleier, 515 U.S. 323, 336 (1995); however, we
need not decide the matter given the conclusion that we reach in
the present case.
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