Reginald James Smith - Page 5

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          Pursuant to section 7491(a), the burden of proof as to factual              
          matters shifts to respondent under certain circumstances.                   
          Because the facts are not in dispute, we decide this case without           
          regard to the burden of proof.                                              
          I.   Taxability of Payment Petitioner Received                              
               A taxpayer’s gross income includes all income from whatever            
          source derived unless excluded by a specific provision of the               
          Internal Revenue Code.  Sec. 61(a).  Gross income does not                  
          include “the amount of any damages (other than punitive damages)            
          received (whether by suit or agreement and whether as lump sums             
          or as periodic payments) on account of personal physical injuries           
          or physical sickness”.  Sec. 104(a)(2).  To qualify for this                
          exclusion, the taxpayer must demonstrate:  (1) The underlying               
          cause of action giving rise to the recovery is based upon tort or           
          tort type rights; and (2) the damages were received on account of           
          personal physical injuries or physical sickness.  Commissioner v.           
          Schleier, 515 U.S. 323, 337 (1995); Allum v. Commissioner, T.C.             
          Memo. 2005-177, affd. 99 AFTR 2d 2007-2527, 2007-1 USTC par 50489           
          (9th Cir. 2007).  The terms “physical injury” and “physical                 
          sickness” do not include emotional distress, except to the extent           
          of damages not in excess of the amount paid for medical care                
          attributable to emotional distress.  Sec. 104(a); see also Prasil           
          v. Commissioner, T.C. Memo. 2003-100.                                       

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