-7-
104(a)(2); sec. 1.104-1(c), Income Tax Regs. Unless petitioners
prove both of these prongs the net settlement payment is not
excludable from gross income under section 104(a)(2). E.g.,
Prasil v. Commissioner, T.C. Memo. 2003-100.
We begin our analysis with the second prong. Our inquiry as
to this prong is twofold. First, we need to decide whether
petitioner’s complaint for sexual harassment, mental anguish,
humiliation, embarrassment, and loss of benefits and other
economic advantages of employment constitutes an allegation of
personal physical injuries or physical sickness. See Horton v.
Commissioner, 100 T.C. 93, 96-98 (1993), affd. 33 F.3d 625 (6th
Cir. 1994). Second, if we find that it does, we need to decide
what part, if any, of the net settlement amount was paid to
petitioner on account of those personal physical injuries or
physical sickness.
Petitioner’s complaint prays for an award only as to the
following four damages: Mental anguish, humiliation,
embarrassment, and loss of benefits and other economic advantages
of employment. The last category of alleged damages (loss of
3(...continued)
predecessor text and enunciated the referenced two-prong test
without mention of the word “physical”. In that the amendment
made to that text by the SBJPA applies to the instant case, it
logically follows that petitioner’s personal injuries or sickness
must be physical in nature to fall within the exclusion of
section 104(a)(2). See Prasil v. Commissioner, T.C. Memo.
2003-100.
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