- 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 NextLast modified: May 25, 2011