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amount of damages not in excess of the amount paid for
medical care * * * attributable to emotional distress.
Legislative history accompanying passage of the SBJPA
additionally clarifies that “the term emotional distress includes
symptoms (e.g., insomnia, headaches, stomach disorders) which may
result from such emotional distress.” H. Conf. Rept. 104-737, at
301 n.56 (1996), 1996-3 C.B. 741, 1041.
Regulations promulgated under section 104 further define
“damages received (whether by suit or agreement)” 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.
Prior to the SBJPA, section 104 authorized exclusion of
damages received on account of “personal injuries or sickness”,
which embraced “nonphysical injuries to the individual, such as
those affecting emotions, reputation, or character”. United
States v. Burke, supra at 235 n.6; see also Commissioner v.
Schleier, supra at 329-331. Interpreting that regime, the U.S.
Supreme Court in Commissioner v. Schleier, supra at 336-337,
established a two-pronged test for ascertaining a taxpayer’s
eligibility for the section 104(a)(2) exclusion. As stated by
the Supreme Court: “First, the taxpayer must demonstrate that
the underlying cause of action giving rise to the recovery is
‘based upon tort or tort type rights’; and second, the taxpayer
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