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“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 the 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 her claims against her former employer
before trial. The parties entered into a written settlement
agreement. The dispute between respondent and petitioner
revolves around the following language in the settlement
agreement: “[Petitioner] acknowledges that she considers the
payment of the check payable to her without withholdings to be
compensation for personal injury (i.e. emotional distress)
damages only”.
The parties agree that this sentence applies to the
$157,000 payment at issue. Petitioner contends that this
language means that the settlement was compensation for personal
injuries including, but not limited to, emotional distress and
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Last modified: May 25, 2011