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physical injuries or physical sickness”.9 The term “damages
received” means an amount received “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. Section 104(a)
further provides that “emotional distress shall not be treated as
a physical injury or physical sickness” for purposes of section
104(a)(2) (except for damages not in excess of the amount paid
for medical care attributable to emotional distress). According
to the legislative history of section 104(a)(2), “[T]he 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 n.56.
Generally, damages are excludable from gross income if they
satisfy two requirements.10 The Supreme Court in Commissioner v.
9 The Small Business Job Protection Act of 1996, Pub. L.
104-188, sec. 1605, 110 Stat. 1838 (1996 amendment), amended sec.
104(a)(2) to narrow the exclusion for personal injury damages
received pursuant to a judgment or settlement, effective for
amounts received after Aug. 20, 1996. Under the 1996 amendment,
personal injury or sickness must be physical in nature.
Moreover, the amendment explicitly excepts punitive damages from
the exclusion provided by sec. 104(a)(2).
10 Under the 1996 amendment, which does not otherwise
change the sec. 104(a)(2) analysis set forth in Commissioner v.
Schleier, 515 U.S. 323, 336-337 (1995), the personal injury or
sickness must be physical in nature to exclude damages from gross
income.
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