- 12 - lawsuit qualifies, or does not qualify, as “damages received * * * on account of personal injuries” under section 104(a)(2). Rather, it is the nature of the taxpayer’s claim underlying the settlement payment that controls. United States v. Burke, supra at 237. In order to come within section 104(a)(2), the taxpayer must show that the legal basis for the recovery redresses a tort or tortlike personal injury. The fact that the lawsuit is for breach of contract, by itself, does not foreclose the possibility that the taxpayer’s claim is for personal injury. To characterize the proceeds of litigation, the test, simply stated, is: “In lieu of what were the damages awarded?” Tribune Publg. Co. v. United States, 836 F.2d 1176, 1178 (9th Cir. 1988); Raytheon Prod. Corp. v. Commissioner, 144 F.2d 110, 113 (1st Cir. 1944), affg. 1 T.C. 952 (1943). In Raytheon Prod. Corp. v. Commissioner, supra at 113, the court held that “The test is not whether the action was one in tort or contract but rather the question to be asked is ‘In lieu of what were the damages awarded?’” See also Milenbach v. Commissioner, 318 F.3d 924, 931-34 (9th Cir. 2003) (whether a portion of the proceeds from settlement of eminent domain action should be characterized as taxable lost profits), affg. in part,Page: Previous 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Next
Last modified: May 25, 2011