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amount of damages not in excess of the amount paid for
medical care * * * attributable to emotional distress.
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.
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 prior to the SBJPA, the U.S. Supreme Court in
Commissioner v. Schleier, supra at 336-337, established a two-
pronged test for ascertaining a taxpayer’s eligibility for the
section 104(a)(2) exclusion. As stated by the Supreme Court:
“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.’”
Id. at 337. This test has since been extended to apply to the
amended version of section 104, with the corresponding change
that the second prong now requires proof that the personal
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Last modified: May 25, 2011