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110 Stat. 1838, section 104(a)(2) excluded from gross income
amounts received on account of personal injuries or sickness.
While the reference to personal injuries or sickness did not
include damages received pursuant to the settlement of purely
economic rights, it did include “nonphysical injuries to the
individual, such as those affecting emotions, reputation, or
character”. United States v. Burke, 504 U.S. 229, 235 n.6
(1992); see Robinson v. Commissioner, 102 T.C. 116, 126 (1994),
affd. in part and revd. in part on another issue 70 F.3d 34 (5th
Cir. 1995); see also Fono v. Commissioner, 79 T.C. 680, 692
(1982), affd. without published opinion 749 F.2d 37 (9th Cir.
1984). The parties have agreed that the version of section
104(a)(2) in effect prior to the 1996 amendment applies to all of
the payments received by petitioner pursuant to the settlement
agreement.
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 tortlike 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.
If damages are received pursuant to a settlement agreement,
the nature of the claim that was the actual basis for settlement,
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