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Glass Co., 348 U.S. 426, 430 (1955). Statutory exclusions from
gross income are construed narrowly. See, e.g., O’Gilvie v.
United States, 519 U.S. 79 (1996); Commissioner v. Schleier, 515
U.S. 323, 328 (1995).
Under section 104(a)(2), settlement proceeds are excludable
from gross income to the extent: (1) The underlying cause of
action is based upon tort or tort-type rights, and (2) the
proceeds were received on account of “personal physical injuries”
or “physical sickness”. See Commissioner v. Schleier, supra at
333-334 (analyzing section 104(a)(2) before its amendment in
1996, which added the restrictive modifier “physical” to limit
the scope of “personal injuries”); Robinson v. Commissioner, 102
T.C. 116 (1994), affd. in part and revd. in part on an issue not
relevant herein 70 F.3d 34 (5th Cir. 1995); Shaltz v.
Commissioner, T.C. Memo. 2003-173; Henderson v. Commissioner,
T.C. Memo. 2003-168. Respondent concedes petitioner has
satisfied the first part of the test and argues only that she has
not satisfied the second. We therefore decide whether any part
of petitioner’s settlement was received on account of “personal
physical injuries” or “physical sickness”. Petitioner argues the
$240,000 attributed in the settlement to “personal injuries and
emotional distress” was so received.
We are not bound by a settlement agreement’s
characterization or division of settlement amounts, particularly
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