- 8 -
(2) the amount of any damages (other than
punitive damages) received (whether by suit or
agreement and whether as lump sums or as periodic
payments) on account of personal physical injuries
or physical sickness;
* * * * * * *
* * * For purposes of paragraph (2), emotional distress
shall not be treated as a physical injury or physical
sickness. * * * [4]
“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.
When damages are received pursuant to a settlement agreement,
courts decide the purpose or purposes for which a payment was made
by considering, inter alia, the following: (1) The underlying
complaint and the nature of the claims; (2) the settlement
negotiations and settlement agreement; and (3) the intent of the
payor. See United States v. Burke, 504 U.S. 229, 237-239 (1992);
Thompson v. Commissioner, 866 F.2d 709, 711 (4th Cir. 1989), affg.
89 T.C. 632 (1987); Knuckles v. Commissioner, 349 F.2d 610, 612-
613 (10th Cir. 1965), affg. T.C. Memo. 1964-33; Bagley v.
4Sec. 104 was amended by the Small Business Job Protection
Act of 1996, Pub. L. 104-188, sec. 1605, 110 Stat. 1838, to
provide, with respect to amounts received after Aug. 20, 1996,
that the personal injury or sickness for which the damages are
received must be physical in nature.
Page: Previous 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Next
Last modified: November 10, 2007