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(Congress’s intent under section 61(a) was to tax income unless
specifically excluded). Exclusions to section 61(a) must be
narrowly construed. Commissioner v. Schleier, 515 U.S. 323, 328
(1995) (citing United States v. Burke, 504 U.S. 229, 233 (1992)).
The parties have agreed on the amounts of various income
items received by petitioner in 2002 but not to the taxability of
petitioner’s recovery of damages for discrimination or to the
treatment of his payment of attorney’s fees associated with the
recovery.
Exclusion of Certain “Damages”
Section 104(a)(2) allows taxpayers to exclude from income
“the amount of any damages (other than punitive damages) received
(whether by suit or agreement * * *) on account of personal
physical injuries or physical sickness”. The flush language of
section 104(a) specifies that “emotional distress shall not be
treated as a physical injury or physical sickness.” But the
exclusion from gross income does apply to the amount of damages
received for any medical care attributable to emotional distress.
Sec. 104(a).
Treasury regulations provide that the term “damages” means
amounts received (aside from workmen’s compensation) through
litigation or settlement of an action that is based on “tort or
tort type rights”. Sec. 1.104-1(c), Income Tax Regs.
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Last modified: November 10, 2007