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retroactive legislation therefore do not justify refusal to apply
the law in effect for the tax year under consideration.
B. Application of Section 104 as Amended
As indicated above, the first requirement for the section
104(a)(2) exclusion is that the claim underlying the funds
received must be based on tort or tort type rights. Commissioner
v. Schleier, supra at 337. A tort is defined as a “‘civil wrong,
other than breach of contract, for which the court will provide a
remedy in the form of an action for damages.’” United States v.
Burke, supra at 234 (quoting Keeton et al., Prosser & Keeton on
the Law of Torts 2 (1984)). State law typically determines the
nature of the legal interests involved. Bland v. Commissioner,
T.C. Memo. 2000-98; Massot v. Commissioner, T.C. Memo. 2000-24.
Here, the parties do not dispute that petitioner’s malicious
prosecution lawsuit sounded in tort under Texas law.
The second requirement for exclusion under section 104 as
amended demands that the damages be received on account of
personal physical injuries or physical sickness. Prasil v.
Commissioner, T.C. Memo. 2003-100. Petitioner’s award comprised
amounts for loss of earning capacity, for attorney’s fees to
defend criminal charges, for mental anguish, and for loss to
reputation. None of these categories is based on a physical
injury or sickness. The amended version of the statute provides
that emotional distress is not a physical injury or physical
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