-9-
surrounding the litigation, the allegations contained in the
complaint, and the course of the settlement negotiations between
the parties. Robinson v. Commissioner, supra at 127-128.
Express allocations in a settlement, identifying payment
amounts deemed eligible for the section 104(a)(2) exclusion, are
generally accorded conclusive effect for tax purposes. Fono v.
Commissioner, 79 T.C. 680, 693-694 (1982), affd. without
published opinion 749 F.2d 37 (9th Cir. 1984). However, the
statutory proviso contained in the penultimate sentence of
section 104(a) dictates one exception to this principle of
judicial deference to manifest allocations. The penultimate
sentence of section 104(a) provides: “For purposes of paragraph
(2), emotional distress shall not be treated as a physical injury
or physical sickness.”
As elucidated in the legislative history of the SBJPA
amendment, “emotional distress” denotes “symptoms (e.g.,
insomnia, headaches, stomach disorders) which may result from
such emotional distress.” H. Conf. Rept. 104-737, at 301 n.56
(1996), 1996-3 C.B. 741, 1041 n.56. To ascertain whether
settlement proceeds fall within the section 104(a)(2) “physical
injuries or physical sickness” rubric--as opposed to ineligible
payments stemming from physical manifestations of emotional
distress--the caselaw surveys the circumstances surrounding the
origin of the injury redressed in the settlement for a sufficient
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