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which is also after the date of enactment of the SBJPA but before
the end of the 1996 taxable year. Thus, applying the plain
language of the statute, petitioner’s receipt of the settlement
proceeds was in a taxable year ending after the effective date of
the amendment. See, e.g., Filson, The Legislative Drafter’s Desk
Reference (1992), illustration in sec. 26.4, Event-related
effective dates. Accordingly, we apply section 104(a)(2), as
amended by the SBJPA.
Application
In interpreting section 104(a)(2), the Supreme Court has
held that amounts are excludable from gross income only when
(1) the underlying cause of action giving rise to the 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, 515 U.S. 323, 336-337 (1995); sec.
1.104-1(c), Income Tax Regs. This test has been extended to
apply to the SBJPA amendments to section 104(a)(2). See Shaltz
v. Commissioner, T.C. Memo. 2003-173; Henderson v. Commissioner,
T.C. Memo. 2003-168. Accordingly, the second prong of the test
requires proof that the damages were received on account of
personal physical injuries or physical sickness.
If damages are received pursuant to a settlement agreement,
the nature of the claim that was the actual basis for settlement,
rather than the validity of the claim, determines whether the
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