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made Bullock aware of his injuries, there is no evidence that any
of the payments received under paragraph 5 and the first annuity
contract were intended by the State to compensate petitioner for
personal injuries or sickness.
Petitioner has failed to establish the second prong of
Schleier because he is unable to establish that any part of the
first annuity was allocable to personal injury or sickness, and
the record lacks any evidentiary basis for concluding that a
specific portion of the first annuity was allocable to any
personal injury or sickness. See Lindsey v. Commissioner, 422
F.3d 684 (8th Cir. 2005), affg. T.C. Memo. 2004-113. Therefore,
after examining the facts and circumstances surrounding the claim
and the settlement agreement, we conclude that the payments
received under paragraph 5 and the first annuity contract are not
excludable under section 104(a)(2) and are to be included in
petitioner’s gross income in the years received.
Paragraph 6 of the settlement agreement allocates the second
annuity contract to “all other damages, including punitive
[damages] and pre-judgment and post-judgment interest”.
Petitioner contends that, notwithstanding this express
allocation, none of the payments received under the second
annuity were for punitive damages or interest.
Punitive damages are included in gross income because they
are an element of damages not designed to compensate victims;
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