William L. and Marsha G. Kidd - Page 10

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               The term “damages received”, as used in section 104(a)(2),             
          denotes 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.  In the absence of bona fide              
          language in a settlement agreement as to the reason for a                   
          settlement payment, we discern that reason by determining the               
          intent of the payor in making the payment.  Robinson v.                     
          Commissioner, 102 T.C. 116, 127 (1994), affd. in part and revd.             
          in part on another issue not relevant herein 70 F.3d 34 (5th Cir.           
          1995).  We do so on the basis of all the facts and circumstances            
          of the case, including an analysis of the complaint filed and the           
          details surrounding the litigation.  Id.                                    
               The $132,000 payment must meet a two-prong test in order for           
          it to be excluded under section 104(a)(2).  First, the underlying           
          cause of action giving rise to Kidd’s recovery of the payment               
          must be based upon tort or tort type rights.  Second, the payment           
          must be received on account of personal physical injuries or                
          physical sickness.  Commissioner v. Schleier, supra at 328; see             
          also sec. 104(a)(2); sec. 1.104-1(c), Income Tax Regs.  Unless              
          both of these prongs are met, the payment is not excludable from            
          petitioners’ gross income under section 104(a)(2).  E.g., Prasil            
          v. Commissioner, T.C. Memo. 2003-100.                                       








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