Kenneth Frank Diller - Page 7




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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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