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allowed under section 213 (relating to medical, etc.,
expenses) for any prior taxable year, gross income does
not include--
* * * * * * *
(2) the amount of any damages (other than
punitive damages) received (whether by suit or
agreement and whether as lump sums or as periodic
payments) on account of personal physical injuries
or physical sickness;
* * * * * * *
* * * For purposes of paragraph (2), emotional distress
shall not be treated as a physical injury or physical
sickness. The preceding sentence shall not apply to an
amount of damages not in excess of the amount paid for
medical care * * * attributable to emotional distress.
The legislative history accompanying passage of the SBJPA
additionally clarifies that “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. Post-SBJPA section 104
is effective for amounts received after August 20, 1996. SBJPA,
sec. 1605(d), 110 Stat. 1839.
Regulations promulgated under section 104 further define
“damages received (whether by suit or agreement)” as “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.
For purposes of applying the above statutory and regulatory
text in effect before the SBJPA, the U.S. Supreme Court in
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