Douglas A. Gibson - Page 9

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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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