-5-
v. Clifford, 309 U.S. 331, 334 (1940)). Exceptions to the
general rule are to be construed narrowly. Commissioner v.
Schleier, 515 U.S. 323, 328 (1995). "[E]xemptions from taxation
are not to be implied; they must be unambiguously proved."
United States v. Wells Fargo Bank, 485 U.S. 351, 354 (1988).
Section 104(a)(2) excludes from gross income "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." (Emphasis added.)
The regulations define "damages received" 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. Damages
received are excludable from gross income only when: (1) The
underlying cause of action giving rise to recovery is based on
tort or tort type rights, and (2) the damages were received on
account of personal injuries or sickness. Commissioner v.
Schleier, supra at 337. The second prong of 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 injuries or sickness for which damages
were received were physical in nature." Venable v. Commissioner,
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