Paul E. Ballmer - Page 6




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               * * * For purposes of paragraph (2), emotional distress                
               shall not be treated as a physical injury or physical                  
               sickness.[2] * * *                                                     
          “Damages received” means amounts received “through prosecution of           
          a legal suit or action based upon tort or tort type rights, or              
          through a settlement agreement entered into in lieu of such                 
          prosecution.”  Sec. 1.104-1(c), Income Tax Regs.                            
               The parties stipulated that petitioner received the                    
          $337,122.53 in question in 2001 and agree that no part of the               
          judgment would be excluded from income pursuant to section                  
          104(a)(2).  Petitioner, however, argues that the award of damages           
          to compensate for emotional distress is not gross income within             
          the meaning of section 61(a) regardless of the exclusions                   
          contained in section 104.  Petitioner, citing certain rulings               
          issued after the 16th Amendment was ratified, 31 Op. Atty. Gen.             
          304, 308 (1918) and T.D. 2747, 20 Treas. Dec. Int. Rev. 457                 
          (1918), as well as a House report accompanying a bill that became           
          the Revenue Act of 1918, H. Rept. 767, 65th Cong., 2d Sess.                 
          (1918), 1939-1 C.B. (Part 2) 86, argues that his recovery from              
          the FTB represents compensation for damage to human capital and             
          thus is not income.                                                         



               2Sec. 104 was so amended by the Small Business Job                     
          Protection Act of 1996, Pub. L. 104-188, sec. 1605, 110 Stat.               
          1838, to provide, effective for amounts received after Aug. 20,             
          1996, that the personal injury or sickness for which the damages            
          are received must be physical.                                              






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