Robert L. Allum - Page 11

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          of the Code.  This statute is construed broadly, whereas                    
          exclusions from gross income are construed narrowly.                        
          Commissioner v. Schleier, 515 U.S. 323, 328 (1995); United States           
          v. Burke, 504 U.S. 229, 233 (1992); Commissioner v. Glenshaw                
          Glass Co., 348 U.S. 426, 431 (1955).  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”.9                                   
               To be eligible for the section 104(a)(2) exclusion, a                  
          taxpayer must demonstrate that (1) the underlying cause of action           
          giving rise to the recovery is based in tort or tort type rights,           
          and (2) the damages were received on account of personal physical           
          injuries or physical sickness.  Commissioner v. Schleier, supra             
          at 337; Prasil v. Commissioner, T.C. Memo. 2003-100.  In the                
          context of section 104(a)(2), the terms “physical injury” and               
          “physical sickness” do not include emotional distress, except to            

               9The Small Business Job Protection Act of 1996 (SBJPA), Pub.           
          L. 104-188, sec. 1605, 110 Stat. 1838, amended sec. 104(a)(2) to            
          narrow the exclusion for damages received for personal injuries             
          or sickness to damages for personal injury or sickness that is              
          physical in nature, effective for amounts received after Aug. 20,           
          1996.  See United States v. Burke, 504 U.S. 229, 236 n.6 (1992)             
          (preamendment personal injuries or sickness did not include                 
          damages pursuant to the settlement of purely economic rights, but           
          did include “nonphysical injuries to the individual, such as                
          those affecting emotion, reputation, or character”).  SBJPA also            
          amended sec. 104(a)(2) to except punitive damages from the                  
          exclusion irrespective of whether they derived from a case                  
          involving physical or nonphysical injury.                                   




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Last modified: May 25, 2011