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* * * For purposes of paragraph (2), emotional distress
shall not be treated as a physical injury or physical
sickness. * * *[6]
“Damages received” mean 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. In
evaluating whether amounts received pursuant to a settlement
agreement are excludable from income pursuant to section
104(a)(2), we look to the written terms of the settlement
agreement to determine the origin and allocation of the
settlement proceeds. See Metzger v. Commissioner, 88 T.C. 834
(1987), affd. without published opinion 845 F.2d 1013 (3d Cir.
1988); Jacobs v. Commissioner, T.C. Memo. 2000-59, affd. sub nom.
Connelly v. Commissioner, 22 Fed. Appx. 967 (10th Cir. 2001).
Petitioner settled his claims against the county. The
parties entered into a settlement agreement via a consent decree
entered by the District Court. In that consent decree, the
District Court granted petitioner declaratory, injunctive, and
monetary relief. Petitioner received $175,000 of the $350,000
awarded to the Gibsons pursuant to the consent decree. The
6 Section 104 was amended by the Small Business Job
Protection Act of 1996, Pub. L. 104-188, sec. 1605, 110 Stat.
1838 to provide, effective for amounts received after August 20,
1996, that the personal injury or sickness for which the damages
are received must be physical.
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Last modified: November 10, 2007