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The Supreme Court in Commissioner v. Schleier, supra, held
that damages are excludable from income under section 104(a)(2)
if they meet a two-pronged test. First, the taxpayer must
demonstrate that the underlying cause of action giving rise to
the recovery is “based upon tort or tort type rights”, and
second, the taxpayer must show that the damages were received “on
account of personal injuries or sickness.” Commissioner v.
Schleier, supra at 335-337. Both requirements must be satisfied
for the damages to be excluded from income. Id. at 333.
Section 104(a)(2) was amended in 1996 to include the
requirement that damages be received for physical injuries or
sickness. Small Business Job Protection Act of 1996, Pub. L.
104-188, sec. 1605(a), 110 Stat. 1838. However, this does not
alter the analysis of Schleier. See Tamberella v. Commissioner,
T.C. Memo. 2004-47, affd. 139 Fed. Appx. 319, 321 (2d Cir. 2005).
None of the underlying documentation describing the nature
of the settlement is in the record. The parties have agreed,
however, that no part of the settlement paid to petitioner was
compensation for physical injury or physical sickness, and
petitioner has made no allegation that the damages were paid for
medical care attributable to emotional distress.
Therefore, petitioner’s recovery is not exempted from
inclusion in gross income under section 61. Because petitioner’s
recovery constitutes income, his income includes the portion of
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