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OPINION
A. Contentions of the Parties and Background
Petitioners contend that all of the $839,000 payment is
excludable from gross income as damages for personal injuries
under section 104(a)(2) and that none is includable in income as
interest. Respondent contends that $255,983 of the $839,000
settlement is interest includable as income under section
61(a)(4). We agree with respondent for reasons discussed below.
Petitioners bear the burden of proving that they may exclude
the $839,000 LPCF payment from income under section 104(a)(2).2
Rule 142(a)(1).
Gross income does not include damages received (whether by
suit or agreement) on account of personal injuries or sickness.
Sec. 104(a)(2).3 However, interest received on damage awards for
personal injuries is not received on account of personal injuries
or sickness and is not excludable from income under section
104(a)(2). Rozpad v. Commissioner, 154 F.3d 1, 6-7 (1st Cir.
1998), affg. T.C. Memo. 1997-528; Brabson v. United States, 73
2 Petitioners do not contend that respondent bears the
burden of proving that sec. 104(a)(2) does not apply. Rule
142(a)(1).
3 The Small Business Job Protection Act of 1996, Pub. L.
104-188, sec. 1605(a), 110 Stat. 1838, amended sec. 104(a)(2) to
limit the exclusion to amounts received for personal physical
injuries or physical sickness. The amount at issue in this case
was received before the effective date of the amendment, and,
thus, the amended version of sec. 104(a)(2) does not apply.
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Last modified: May 25, 2011