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The first issue for decision is what portion, if any, of the
$50,000 payment petitioner received in 1999 is excludable from
gross income. We decide this issue on the merits based on the
preponderance of evidence, without regard to the burden of proof.
See sec. 7491(a); Rule 142(a)(1).
Section 61 provides that gross income generally includes all
income from whatever source derived. However, section 104(a)(2)
excludes from gross income amounts received in damages, by suit
or settlement, “on account of personal physical injuries or
physical sickness”. In determining whether damages received are
excludable under section 104(a)(2), the focus is the nature of
the claim underlying the damage award. United States v. Burke,
504 U.S. 229, 237 (1992). The underlying claim giving rise to
the recovery must be “based upon tort or tort type rights” and
the damages must have been received “on account of personal
injuries or sickness”. Commissioner v. Schleier, 515 U.S. 323,
336-337 (1995). Section 104(a)(2) was amended in 1996, effective
for amounts received after August 20, 1996, to require that the
personal injury or sickness be physical in nature; this amendment
does not otherwise change the analysis under Commissioner v.
Schleier, supra. Prasil v. Commissioner, T.C. Memo. 2003-100.
For purposes of section 104(a)(2), emotional distress is not
treated as a physical injury or physical sickness, except for any
damages received that are not in excess of the amount paid for
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