-11-
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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