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Personal Physical Injuries or Physical Sickness
To be excludable under section 104(a)(2) and to satisfy the
second part of the Schleier test, the damages must have been
received “on account of personal physical injuries or physical
sickness.” This analysis is also guided by the “nature of the
claim underlying” the settlement. United States v. Burke, supra
at 237. The Court must therefore decide whether the amounts
Associates paid petitioner were for personal physical injuries or
physical sickness.
The flush language of section 104(a) makes it clear that
emotional distress shall not be treated as a physical injury or
physical sickness. “[M]ental anguish, humiliation, and
embarrassment are not personal physical injuries or physical
sickness * * * but are most akin to emotional distress.” Shaltz
v. Commissioner, T.C. Memo. 2003-173. Anxiety is also part of
emotional distress. 4 Restatement, Torts 2d, sec. 905 (1979).
Physical manifestations of emotional distress such as fatigue,
insomnia, and indigestion do not transform emotional distress
into physical injury or physical sickness. See Goode v.
Commissioner, T.C. Memo. 2006-48.
Neither the charging document nor the settlement agreement
references any personal physical injuries. The settlement
agreement specifically states that the amount paid includes
vacation pay and money owed to petitioner by Associates and
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Last modified: November 10, 2007