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payments. Respondent did not make an adjustment in the statutory
notice of deficiency with respect to this issue. By amended
answer, respondent asserts that petitioners must include in gross
income the principal portions of the payments, $8,511 in 1996 and
$10,034 in 1997.
Discussion
Gross income generally includes income from whatever source
derived, unless excluded by statute. Sec. 61(a). The exclusion
upon which petitioners rely in this case is that of section
104(a)(2), which excludes 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.”1 The Supreme Court, in Commissioner v.
Schleier, 515 U.S. 323 (1995), summarized the requirements of
section 104(a)(2) as follows:
In sum, the plain language of � 104(a)(2), the text of
the applicable regulation, and our decision in Burke
establish two independent requirements that a taxpayer must
meet before a recovery may be excluded under � 104(a)(2).
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.” * * *
1Sec. 104(a)(2) was amended by the Small Business Job
Protection Act of 1996, Pub. L. 104-188, sec. 1605, 110 Stat.
1755, 1838. We apply the statute as it was in effect prior to
amendment because the payments in this case were received
pursuant to a court decree issued before September 13, 1995. Id.
sec. 1605(d)(2), 110 Stat. 1838.
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