§104 — Compensation for injuries or sickness

The amendment overruled court decisions that exempted payments for nonphysical injuries from gross income .

Section 104(a)(1) and the regulations thereunder provide that retirement payments are excludable from gross income ifthey are received pursuant to a workmen's compensation act or a statute in the nature ofa workmen's compensation act. See Sewards v. Commissioner, 138 T.C. 320, 322 (2012), M, 785 F.3d 1331 (9th Cir. 2015); sec. 1.104-1(b), Income Tax Regs. Section 104 does not apply, however, to the extent that payments are determined by reference to the employee's age or length ofservice or the

Under section 104(a)(1) gross income does not include amounts received under workmen's compensation acts as compensation for personal injuries or sickness. This exclusion also applies to statutes in the nature ofworkmen's compensation acts which provide compensation to employees for personal injuries or sickness incurred in the course ofemployment. Sec. 1.104-1(b), Income Tax Regs. The exclusion, however, "does not apply to a retirement pension or annuity to the extent that it is determined by r

In 2012 the Commissioner officially explained that the "tort-type rights test was intended to distinguish damages for personal injuries from, for example, damages for breach ofcontract." T.D. 9573. The change in the section 104 regulation reflected a profusion ofremedies for persons who are physically injured and recover under no-fault statutes, so that they are treated like those who are physically injured and recover through more traditional actions in tort.

Accordingly, section 104(a)(1) does not serve to exclude the $65,000 settlement payment from petitioner's income. C. Section 104(a)(3) Generally, amounts received through accident or health insurance for personal injuries or sickness are excluded from gross income under section 104(a)(3). This exclusion does not apply, however, ifthe amounts are either (1) attributable to contributions by the employer that were not includible in the gross - 25 - income ofthe employee or (2) paid by the employer

Conversely, petitioner contends that from the first day - 6 - of his disability, his benefits were exclþdable under section 104 because of his disability. Section 104(a) (1) permits the exclusion from gross income of amounts received under worker's compensation acts as compensation for personal injuries. In particular, section 1.104-1(b), Income Tax Regs., limits the section 104(a) (1) eáclusion to certain benefits. That regulation specifies that the section 104(a) (1) exclusion does not apply

UFCW Pension' Plan disability retirement benefi s under section 104 (a) (1) , section 104 (a) (2) , or section 105 (c) 1. , The Benefits Are Not Excludable Under Section 104 (a) (1) . S ction 104 (a) (1) provides that gross income does not includ "amounts received under sworkmen' s compensation -acts as compensation for personal injuries or sickness" . The section 104 (a) 1) exclusion does not apply to benefits paid pursuant to a privat contractual relationship.

Exclusion Provisions of Sections 104 and 10 5 Section 72 applies to "a pension plan * * * which provides for the payment of pensions at retiremen and the payment of an earlier pension in the event of permanen disability ." Sec . 1 .72-15(a), Income Tax Regs . However, s ction 72 does not apply to any amount received as an accident or health benefit, and the tax treatment of any such amount is determined under sections 10 4 z( .

The cases distinguish among three types of statutes : (cid:127) Statutes awarding disability pay only for work-related injuries ; (cid:127) statutes awarding disability pay for both work- related and non-work-related injuries, but pursuant to separate and independent clauses ; and (cid:127) statutes awarding disability pay regardless of whether the injuries triggering the award are work related . Awards under the first type of statute are excludable unde r section 104(a)(1) as analogous to workm

- 5 - Section 1.104-1(b), Income Tax Regs., provides in pertinent part: Section 104(a)(1) excludes from gross income amounts which are received by an employee under a workmen’s compensation act * * * or under a statute in the nature of a workmen’s compensation act which provides compensation to employees for personal injuries or sickness incurred in the course of employment. * * * However, section 104(a)(1) does not apply to a retirement pension or annuity to the extent that it is determined by

Clearly, petitioner's claims are unlike the "Claims for potential future personal injuries" which the court in the case cited by respondent, Greer v . United States , supra at 327 said "are insufficient ." Moreover, the nature of petitioner's claims, and not the validity of the claims, controls whether a payment in settlement thereof is excludable under section 104(a)(2) .

Commissioner, supra, does not apply the current statute and, therefore, is distinguishable from the present case.

Valentine argues that the disability determination she received from the VA entitles her to exclude from gross income not only her disability payments (which the Commissioner concedes, pursuant to section 104(a)(4) and (b)(2)(D)) but also a portion of her retirement distributions.9 Ms.

Therefore, the payments made to petitioner wife under the settlement agreement are not excludable pursuant to section 104(a)(1).

Molina received in 2007 from the settlement ofhis lawsuit against his former employer are excludable from petitioners' gross income pursuant to section 104(a)(2).

Section 104 provides otherwise by authorizing an exclusion with respect to compensation for injuries or sickness.

Section 104 As relevant here, section 104 provides in part: SEC.

We hold that they are not.

McGowen contends that the emotional distress payment constitutes damages received on account of physical injuries and is excludable pursuant to section 104 (a) (2).

Office of Personnel Management (OPM) are excludable from petitioners' SERVEDMar102011 - 2 - income pursuant to section 104(a) (4), and whether respondent is barred from determining a deficiency for petitioners' 2006 tax year because he issued closing letters for previous tax years that accepted petitioners' returns as filed.1 FINDINGS OF FACT Some of the facts and certain exhibits have been stipulated.

For the reasons set forth below, we hold (i) that no portion of the $65,675 Mr.

' We hold that the payment is not excludable under section 104(a)(2) from petitioner's gross-income for her taxable yea r 2005, except to the extent of any amount she paid for medical care to treat her emotional distress .

Accordingly, we hold that one-half of the settlement payment that petitioner received in 2005 was'made on account of physical" injury orlphysical.sickness and is`excludable from his gross income under section 104(a)(2) .

For the reasons set forth below, we hold that (1) the $156,667 proceeds of the lawsuit settlement was not properly excludable from Mr .

For these reasons, we hold that the payment to petitioner was not damages received on account of personal physical injury or sickness and therefore is not excludable from income under section 104 (a) (2) To reflect the foregoing, Decision will .be entered under Rule 155 .

The issues for decision are : (1) Whether petitioner may exclude the settlement proceeds received from his gross income pursuant to section 104(a)(2) ; and (2) whether petitioner is liable for an addition to tax under section 6651(a)(1) for hi s failure to timely file a return .

Consequently, we conc ude that :petitioner has shown that $50,000'of the payment at issue is excludable from gross incom e pursuant to section 104(a) 3) ands had ,failed to show any bas i for excluding the remainder .

.) 2 - pursuant to a class action settlement agreement is excludable ,from gross income under section 104(a)(2)(cid:127)2 We hold it is not .

We hold that he is not .

We hold that the $30,000 is not excludable from gross income under section 104(a).

In view of our finding that petitioner paid the premiums for his disability insurance with after-tax dollars, we hold that the disability benefits received by petitioner in 1997 are excludable from gross income for that year.

Respondent contends that the lawsuits were principally for personal injuries suffered by petitioner and his family, and that the legal fees would not be deductible because any recovery from the lawsuits would be nontaxable under section 104.

- 17 - Respondent contends that (1) the doctrine of res judicata precludes petitioner from litigating every issue petitioner raised other than the filing status issue, (2) the doctrine of collateral estoppel precludes petitioner from litigating the section 104 issue, and (3) petitioner’s filing status for 1994 is married filing separate.

In the Consideration section, petitioner’s attorneys included a statement that the settlement proceeds were in satisfaction of petitioner’s claims for personal injuries, “within the meaning of title 26, section 104, of the United States Code”, resulting from the alleged tortious conduct by First City Bank (the section 104 sentence).8 The FDIC attorney was surprised by the inclusion of the section 104 sentence.

section 104(a), and consequently were includable in petitioners’ 1990 taxable income. Respondent also determined that all amounts of prejudgment interest received were includable in petitioners’ taxable income. OPINION A. Exclusion of Damages Under Section 104 1. In General Gross income includes income from whatever source derived. Sec. 61(a). Statutory exclusions from income are narrowly construed. Commissioner v. Schleier, 515 U.S. 323, 327 (1995); United States v. Burke, 504 U.S. 229, 233 (19

The text of section 104, the legislative history thereunder, and the regulations prescribed thereunder do not define the term “personal injuries”.

Petitioners timely petitioned this Court for redetermination, prin- cipally contending that the SSDI benefits were excludable from gross income un- der section 104.3 On May 22, 2017, the parties submitted the case for decision without trial under Rule 122.

The first section 104 regulations, enacted in 1960, required damages to be linked to a tort or tort-type right.

The tort-type rights test was intended to distinguish damages for personal injuries from, for example, damages for breach ofcontract. Since that time, however, Commissionerv. Schleier, 515 U.S. 323 (1995), has interpreted the statutory "on account of" test to exclude only damages directly linked to "personal" injuries or sickness. Furthermore, under the 1996 Act, only damages for personal physical injuries or physical sickness are excludable. These legislative andjudicial developments have elimi

It is well established that statutory exclusions, such as those provided in section 104, are to be narrowly construed, see Commissioner v.

Petitioners seek to- exclude the payments under section 104(a) (4) as "amounts received as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces of any country". Benefits paid under CSRS do not provide compensation for personal injuries or sickness incurred in military service so as to be excludable under section 104(a) (4). Haar v. Commissioner, 78 T.C. 864 (1982), affd. per curiam 709 F.2d 1206 (8th Cir. 1983); Jeanmarie v.

3 Section 104(a)(2), as in effect prior to its amendment in 1996,4 excludes from gross income "any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or sickness" . Section 1.104-1(c), Income Tax Regs ., defines "damages received" as "an amount received (other than workmen's compensation) through prosecution of a legal suit or action based upon tort or tort type rights, or through a settlement agreement entered into in

Section 104(a)(1) Section 104(a)(1) excludes from gross income “amounts received under workmen’s compensation acts as compensation for personal injuries or sickness”. The regulations provide that section 104(a)(1) includes “a statute in the nature of a workmen’s compensation act which provides compensation to employees for personal injuries or sickness incurred in the course of employment.” Sec. 1.104-1(b), Income Tax Regs. A statute that conditions eligibility for benefits on the existence of a

not Tier 1 benefits taxed under section 86.4 Tier 2 benefits consist of all benefits under the Railroad Retirement Act of 1974 other than Tier 1 benefits and are taxed 3 Petitioners do not contend that the annuity distribution is exempt under either sec. 104, compensation for illness, or sec. 105, amounts received under health plans. We have examined both sections and do not find that either applies. 4 Petitioner applied to the RRB for a Social Security equivalent benefit designation for her dis

Nevertheless, a statute that conditions eligibility for benefits on the existence of a work-related injury or sickness may qualify as a workers’ compensation act for purposes of section 104 even though those benefits are called “disability retirement benefits.” See Take v.

Section 104, in contrast, provides an exclusion with respect to compensation for injuries or sickness. Such exclusions from gross income are construed narrowly. Commissioner v. Schleier, supra at 328; United States v. Burke, 504 U.S. 229, 248 (1992); Banaitis v. Commissioner, supra at 1079. Section 104(a) provides in pertinent part: SEC. 104. COMPE

Although section 104 does allow a taxpayer to exclude workers’ compensation payments from gross income, Mr.

he statute vague or ambiguous and does not persuade us to 11When other constitutional challenges have been raised against sec. 104(a)(2), the statute consistently has been upheld. See, e.g., Polone v. Commissioner, T.C. Memo. 2003-339 (postamendment sec. 104 is not unconstitutionally retroactive); Venable v. Commissioner, T.C. Memo. 2003-240 (postamendment sec. 104 is neither retroactive nor unconstitutional), affd. 110 Fed. Appx. 421 (5th Cir. 2004); see also Young v. United States, 332 F.3d 89

Reimels' s Social Security disability insurance benefits were "received as a pension, annuity, or similar allowance" within the meaning of section 104 (a) (4) ; consequently, for present purposes we assume that they were.5 Nor does respondent dispute that Mr. Reimels has suffered personal injuries or sickness resulting from active service in the U.S. Armed Forces. Instead, relying on Haar v. Commissioner, 78 T.C. 864, 866 (1982), affd. 709 F.2d 1206 (8th Cir. 1983), and its progeny, respondent c

The question is whether section 104 provides an exception that allows petitioners to exclude Mr.

Section 104, in contrast, provides an exception with respect to compensation for injuries or sickness. Such exclusions from gross income are construed narrowly. Commissioner v. Schleier, supra at 328; United States v. Burke, 504 U.S. 229, 248 (1992) (Souter, J., concurring in judgment); Banaitis v. Commissioner, supra at 1079. Section 104 reads in

ted a copy of petitioners’ joint Federal income tax return for 1996. The copy of the return in the record does not have attached the Tax Court decision for petitioners’ 1990 taxable year. - 17 - determined that the $45,615 was not excludable under section 104. Petitioners have cooperated with all respondent’s requests for meetings, interviews, witnesses, information, and documents, including providing, within a reasonable time, access to and inspection of witnesses, information, documents within

Under IRC section 104, amounts received in May 1996 on account of claims for defamation and other tort type rights were excludable from gross income.

tinguish between work- related injuries and other types of injuries is not in the nature 4A law that conditions eligibility for benefits on the existence of a work-related injury or sickness may qualify as a workers’ compensation act for purposes of sec. 104 even though those benefits are styled “disability retirement benefits.” Take v. Commissioner, 804 F.2d 553, 557 (9th Cir. 1986), affg. 82 T.C. 630 (1984); Rev. Rul. 83-91, 1983-1 C.B. 38. - 6 - of a workers’ compensation act. Rutter v. Commi

Whether Petitioners May Exclude From Gross Income Under Section 104.(a)(2) $59,163 That Petitioner Received in 1994 Petitioners contend that the $59,163 that petitioner received.from Xircom in 1994 is excludable from gross income as da ages for a personal injury under section 104(a)(2).3 Pet tioners contend that.Xircom and AT&T colluded to prevent pet tioner from being employed by either of them.

n and accepting 12 months of severance pay. Petitioner rejected the offer and made a counteroffer proposing, among other things, that a portion of any funds paid be allocated to personal injuries in order to enable him to exclude such proceeds under section 104. Okabena asked petitioner to turn over his keys and not to return to Okabena’s offices. Additional negotiating sessions and conferences regarding the proposed settlement were held on April 16, 19, 20, and 21, 1993. On April 21, 1993, Mr.

Court of Appeals for the Ninth Circuit held that pension benefits paid to a disabled worker remained excludable under section 104 where the pension was reduced, but the taxpayer was not transferred from a disability pension to a general pension.

terest, and, if so, whether it is excludable from gross income as damages for a - 2 - personal injury under section 104(a)(2). We hold that $64,510.60 (45.43 percent of the $137,437.50 payment) was prejudgment interest, and is not excludable under section 104. Unless otherwise specified, section references are to the Internal Revenue Code in effect for the year in issue. Rule references are to the Tax Court Rules of Practice and Procedure. Background The parties submitted this case fully stipula

er section 104(a)(2). We hold that $78,190 (42.53 percent of the $183,852 payment to Michael and Carrie Woods) and $790,587 (42.53 percent of the $1,858,948 payment to Jacquelyn Woods) was prejudgment interest and is not excludable from income under section 104. Unless otherwise specified, section references are to the Internal Revenue Code in effect for the year in issue. Rule references are to the Tax Court Rules of Practice and Procedure. Background The parties submitted these cases fully sti

One - 7 - of the aforementioned exceptions is contained in section 104, which excludes from gross income certain compensation for injuries or sickness.

This Court later stated in a Court-reviewed opinion that “Exclusion under section 104 will be appropriate if compensatory damages are received on account of any invasion of the rights that an individual is granted by virtue of being a person in the sight of the law.” Threlkeld v. Commissioner, 87 T.C. 1294, 1308 (1986), affd. 848 F.2d 81 (6th Cir. 1988). We noted, referring to the Court of Appeals statement above, that “Although a corporation is treated as a ‘person’ for many purposes, it is, no

The issues we must decide are: (1) Whether petitioner may exclude from gross income under section 104 amounts received from her former employer pursuant to a settlement agreement; and (2) whether petitioner's legal expenses are properly deductible as a miscellaneous itemized deduction.

, 115 S. Ct. 2159, 2163 (1995); United States v. Burke, 504 U.S. 229, 233 (1992); Banks v. United States, 81 F.3d 874 (9th Cir. 1996). Respondent argues that petitioner, , because it is a corporation, did not suffer a personal injury for purposes of section 104. Petitioner argues that it did receive the proceeds on account of a personal injury, given the fact that it had only one shareholder. Petitioner argues that the consequences of the defendants’ “wrongful conduct” fell entirely upon Mr. Mag

ment interest, and, if so, whether it is excludable from gross income as damages for a - 2 - personal injury under section 104(a)(2). We hold that $42,910 (28.61 percent of the $150,000 payment)1 was prejudgment interest and is not excludable under section 104. Unless otherwise specified, section references are to the Internal Revenue Code in effect for the year in issue. Rule references are to the Tax Court Rules of Practice and Procedure. Background The parties submitted this case fully stipul

507 F.3d at 868. Respondent argues that petitioner’s description of the settlement payment from the lawsuit against his former wife in Florida failed to mention physical injury or sickness, and therefore no portion of the payment is excludable under section 104. However, the applicable test concerns the intent of the payor, not the payee. See Green v. Commissioner, 507 F.3d at 868. Accordingly, we must instead ascertain the Town of Bolton’s intent in making the payment, and the information avail

- 21 - [*21] 323, 337 (1995) (quoting section 104);7 see also Green v.

Lakner received from the VA in 2008 was excludable from gross income under section 104, but they provided no credible evidence that the VA made this payment on account ofdisability, physical injury, or physical sickness.

Lakner received from the VA in 2008 was excludable from gross income under section 104, but they provided no credible evidence that the VA made this payment on account ofdisability, physical injury, or physical sickness.

Damages Received As indicated above, we must first determine whether petitioners received damages within the meaning ofsection 104.4 See id.; see also sec.

m the Los Angeles County Employees Retirement Association (lacera.) pursuant to a divorce agreement awarding her a portion of her former husband’s disability pay. The issue for decision is whether petitioner may exclude the $11,691 from income under section 104. Background This case was submitted at the scheduled trial session fully stipulated pursuant to Rule 122. The parties’ stipulation of facts, with accompanying exhibits, is incorporated herein by this reference. At the time the petition wa

For the damages to be excluded under this provision, the underlying cause of action must be based in tor:.or tort-type rights and the proceeds must be damages received on account of personal physical injury or sickness. Commissio:2er v. Schleier, supra at 337. Where damages a::e received pursuant to a settlement agreement, the nat

229, 237 (1992) (determining excludability from gross income under section 104 (a) (2)).

for decision are whether petitioner may, pursuant, to section 104, exclude settlement proceeds from her gross income, and whether petitioner is liable for an accuracy-related penalty under section 6662 .

Petitioner wife, l is J although she suffered physically, . was li not compensated for that physical injury.. Petitioners do not claim that-any-portion o f the settlement proceeds were to reimblurse them for amounts paid for medical care attributable to emotdonal_distress . See sec.. 104 (a) d( (flush language) ;, Sanford v . Commissi

Section 104 (a) provides that gross income does not include : (2) the amount of any damages [41 (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 ; * * * * * * * * * For purposes of paragraph (2), emotional distre

2,887 Debt canceled 1,759 Settlement 75,750 Nontaxable sec . 104 (75,750 ) Total 4,646 The disclosure on their 2003 return reflected petitioners' understanding that the $75,750 of the $120,000 payment was not taxable (i .e ., it was excludable under section 104) . - 6 - Respondent determined that the amount of petitioners' other income on their 2003 return should be increased by $75,749 because this amount was not excludable from income .2 Respondent also determined a section 6662 penalty for 20

We find that petitioner's termination from employment, his eviction resulting in temporary homelessness, his health issues, and the technical nature of the law as to the exclusion of income under section 104 are factors that weigh in his favor .

ould be excluded from income pursuant to section 104(a)(2) . Petitioner, however, argues that the award of damages to compensate for emotional distress is not gross income within the meaning of section 61(a) regardless of the exclusions contained in section 104 . Petitioner, citing certain rulings issued after the 16th Amendment was ratified, 31 Op . Atty . Gen . 304, 308 (1918) and T .D. 2747, 20 Treas . Dec . Int . Rev . 457 (1918), as well as a House report accompanying a bill that became the

giving rise to the recovery is based upon tort or tort type rights, and (2) the taxpayer shows that the damages were received on account of personal injuries or sickness . Id . at 336 . The specific exclusion upon which petitioner relies is found in section 104 . Section 104, as relevant here, provides : SEC . 104 . COMPENSATION FOR INJURIES OR SICKNESS . (a) In General .--Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medic

Section 104 provides for an exclusion from gross income for certain payments received as compensation for injuries or sickness. Specifically, section 104(a)3 provides in part: SEC. 104. COMPENSATION FOR INJURIES OR SICKNESS. (a) In General.--Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (r

Section 104 It is well established that, pursuant to section 61(a), gross income includes all income from whatever source derived unless otherwise excluded by the Internal Revenue Code . See Commissioner v .'Glenshaw Glass Co . , 348 U .S . 426, 429-431 (1955) . Exclusions from gross income are construed narrowly . Commissioner v . Schleier , 515 U

Section 104 It is well established that, pursuant to section 61(a), gross income includes all income from whatever source derived unless otherwise excluded by the Internal Revenue Code. See . . Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429-431 (1955). Exclusions from gross income are construed narrowly. Commissioner v. Schleier, 515 U.S. 32

nature of the claim that was the actual basis for settlement controls whether such amounts are excludable under section 104 (a) (2) .

Green in 2000 and 2001 were paid in lieu of workmen’s compensation, and thus, pursuant to section 104, are excludable from gross income.2 Section 104 states that gross income shall not include those “amounts received under workmen’s compensation acts as compensation for personal injuries or sickness”.

m of income for the taxable year in which the item is actually or constructively received. See sec. 451(a); see also Polone v. Commissioner, T.C. Memo. 2003-339; Knoll v. Commissioner, T.C. Memo. 2003-277 (applying this principle in the context of a section 104 case). The record does not support petitioner’s claim for exclusion. Petitioner applied for workers’ compensation benefits - 8 - with the State of California on April 9, 1997, but was not awarded any benefits until May 31, 2001. Petitione

Section 104, in contrast, provides an exception with respect to compensation for injuries or sickness. Such exclusions from -6- gross income are construed narrowly. Commissioner v. Schleier, supra at 328; United States v. Burke, 504 U.S. 229, 248 (1992) (Souter, J., concurring in judgment). Before its amendment on August 20, 1996, by the Small Bus

- 2 - The issues for decision are: (1) Whether under section 104 petitioner may exclude from gross income $89,840 in proceeds from a legal settlement; (2) whether petitioner is liable for the section 6651(a)(1) addition to tax for failure to file on time a Federal income tax return for 1997; and (3) whether petitioner is liable for the accuracy-related penalty under section 6662(a).

104, I.R.C., as amended by the Small Business Job Protection Act of 1996, Pub. L. 104-188, sec. 1605, 110 Stat. 1838, is applicable to determine excludability from gross income of the damages P received. Held, further, the payment P received pursuant to the malicious prosecution lawsuit is not excludable from gross income for 1998 under sec. 1

Section 104 provides for an exclusion from gross income for certain payments received as compensation for injuries or sickness. Specifically, section 1047 provides: SEC. 104. COMPENSATION FOR INJURIES OR SICKNESS. (a) In General.–-Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to

Section 104 provides for an exclusion from gross income for certain payments received as compensation for injuries or sickness. Specifically, section 1047 provides: SEC. 104. COMPENSATION FOR INJURIES OR SICKNESS. (a) In General.–-Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to

x- payer, a Florida orchid grower, for loss of business reputation and loss of business reputation as an orchid grower, in settlement of his claim for negligence and strict liability in tort against du Pont, after appli- cation of its chemical fungicide on his orchids, was - 7 - not made “on account of personal injuries” within the meaning of IRC § 104 * * * [a](2) and was includable in gross income for income tax purposes).

nd are distributed in the same amount as Social Security benefits. Tier I benefits are taxed under the provisions of section 86. If, however, Tier I benefits are paid as compensation for injuries or sickness, the payments are not taxable pursuant to section 104. Tier II benefits, which are in the nature of pension benefits, are taxed under the provisions of section 72(r). See Ernzen v. United States, 875 F.2d 228 (9th Cir. 1989); Wallers v. United States, 847 F.2d 1279 (7th Cir. 1988); Bradley v

Section 104 is to be narrowly construed; it does not specify that interest is excluded from gross income. See Commissioner v. Schleier, 515 U.S. at 337; Kovacs v. Commissioner, 100 T.C. 124, 128-130 (1993), affd. without published opinion 25 F.3d 1048 (6th Cir. 1994). Conceptually, an award of damages is different from an award of interest on damag

Section 104 is to be narrowly construed; it does not specify that interest is excluded from gross income. See Commissioner v. Schleier, 515 U.S. at 337; Kovacs v. Commissioner, 100 T.C. 124, 128-130 (1993), affd. without published opinion 25 F.3d 1048 (6th Cir. 1994). Conceptually, an award of damages is different from an award of interest on damag

yment, and we do likewise for purposes of our discussion. Discussion We must decide whether the $58,845 received by petitioner in conjunction with her termination from PSC is excluded from income as compensation for injuries or sickness pursuant to section 104. I. General Rules As a general rule, the Internal Revenue Code imposes a Federal tax on the taxable income of every individual. See sec. 1. Section 61(a) specifies that “Except as otherwise provided”, gross income for purposes of calculati

Gill’s view of certain case law under section 104 and concluded: Although I am sure that Heinz and Mr.

Petitioners attached to their return a Form 8275, Disclosure Statement, explaining that they had not included the subject $24,060.44 in their gross income for 1994 because they believed such payment was: not taxable under Section 104 of the Internal Revenue Code because the payment was made as a consideration to the taxpayer for his release of his employer for any claim he might have against his employer for age discrimination and other potential tort claims.

Prior to trial respondent conceded that the Warwick Code meets the requirements of section 104 and contended that petitioner's pension payments were made pursuant to the collective bargaining agreement.

en if we were to consider the issue of negligence, our conclusion would be the same for the reasons subsequently stated herein. - 8 - Court's opinion in Commissioner v. Schleier, supra. Prior to that time there was confusion concerning the scope of section 104. Indeed, even in the wake of Commissioner v. Schleier, supra, there is continuing litigation concerning releases similar to that executed here. See, e.g., Brennan v. Commissioner, T.C. Memo. 1997-317; Morabito v. Commissioner, T.C. Memo. 1

The second motive for payment might have been future claims for personal injuries, but this source is also precluded from the exclusion provided by section 104, Roosevelt v.

Compensation for injuries or sickness. (a) In General. * * * gross income does not include-- * * * * * * * (4) amounts received as a pension, annuity, or similar allowance for personal injuries or (continued...) - 6 - The principal case interpreting the application of section 104(a)(4) is Haar v. Commissioner, 78 T.C. 864 (1982), affd. 7

Section 104 is a provision of the Code which excludes certain forms of compensation for injuries or sickness from gross income. In pertinent part section 104(a)(4) excludes amounts received by a taxpayer as a pension, annuity, or similar allowance for personal injuries or sickness. However, the underlying injury or sickness must be attributable to

As respondent points out, compensation paid for injuries or sickness may be excludable from gross income under section 104 if certain designated requirements are met, such as the compensation’s having been received under a workmen’s compensation act or through accident or health insurance.

A 1989), Pub. L. No. 101-239, § 7110, 103 Stat. 2106, 2322–26, the Small Business Job Protection Act of 1996 (SBJPA), Pub. L. No. 104-188, § 1204, 110 Stat. 1755, 1773–75, and the Tax Relief and Health Care Act of 2006 (TRHCA), Pub. L. No. 109-432, §§ 104, 123(a), 120 Stat. 2922, 2934–36, 2944. 7 The five methods are (1) the incremental research credit under section 41(a)(1); (2) the basic research credit under section 41(a)(2); (3) the credit related to energy research under section 41(a)(3); (

51, 58 (2015).2 We must first determine whether petitioner received damages within the meaning ofsection 104.3 The regulations defime the term "damages" as "an amount received (other than workers' compensation) through prosecution ofa legal suit or action, or through a settlement agreement entered into in lieu of prosecution." Sec.

It went on to consider the "sum total ofpetitioner's business activities" to ascertain whether "petitioner comes within the classification set out in section 104 ofa 'bank', and within the general meaning ofthat term." M The Fourth Circuit concluded that an entity must manifest three basic fea- tures to bring itself"within the commonly understood definition ofa 'bank'." I_d.

It went on to consider the "sum total ofpetitioner's business activities" to ascertain whether "petitioner comes within the classification set out in section 104 ofa 'bank', and within the general meaning ofthat term." M The Fourth Circuit concluded that an entity must manifest three basic fea- tures to bring itself"within the commonly understood definition ofa 'bank'." I_d.

at 847, information that was conveyed to the IRS examiner. - 9 - [*9] The undersigned is a certified public accountant who is familiar with the assets being appraised. The undersigned is not a party to any transaction related to this appraisal. The undersigned understands that a false or fraudulent overstatement ofthe value ofth

Lakner received from the VA in 2008 was excludable from gross income under section 104, but they provided no credible evidence that the VA made this payment on account ofdisability, physical injury, or physical sickness.

104(i), 80 Stat. (continued...) - 27 - Taxpayer's Bill ofRights (TBOR) included a provision that changed the text of section 6343(a) from its original wording to what was in force during the year at issue in this case.¹6 Technical and Miscellaneous Revenue Act of 1988 (TAMRA), Pub. L. No. 100-647, title VI, subtitle J, sec. 6236(f), 102 Stat.

To do so, we apply the section 104 rules, which detail when damage awards can be excluded from gross mcome.

It went on to consider the “sum total of petitioner’s business activities” to ascertain whether “petitioner comes within the classification set out in section 104 of a ‘bank’, and within the general meaning of that term.” Ibid.

Petitioner does not point to any provision of the Internal Revenue Code, such as section 104, as authority for his position.

In so doing, we note that only section 104 need be mentioned, and then only briefly and only with reference to the settlement payment.

The legislative history of section 104 specifically contemp ates that emotional distress may manifest itselfin physical symptoms by explicitly isting physical symptoms as symptoms that may result from emotional distress.

The taxpayer bears the burden of establishing that he or she is entitled to the section 104 or 105 exclusion.

The settlement agreement gave the taxpayer similar actual damages of approximately $14 million, excludable under section 104 (a) (2), but expressly disclaimed any payment of punitive or treble damages that would have been taxable as ordinary income.

t Petitioners contend that the settlement is excludable from gross income under section 104 (a) (2), which provides an exclusion'from gross income fo damages received on account of personal injuries or physical sickness.

For the damages to be excluded under this provision, the underlying cause of action must be based in tort or tort-type rights and.the proceeds must be damages received on account of personal physical injury or sickness. Commissioner v. Schleier, supra at 337. Emotional distress is not treated as a personal phÿsical injury or phys

unfortunately, however, their argument is unavailing, as explained in Roberts v. Commissioner, T.C. Memo. 1998-172, affd. without published opinion 182 F.3d 927 (9th Cir. 1999). Petitioners' second argument is that SSD benefits are excludable under section 104. It is well established that SSD benefits are includable in income under section 86 and are not 2The stipulation of facts and the attached exhibits are incorporated herein by this reference. -3- excludable as workmen's compensation benefi

To justify excluding the $22,171 from income under section 104, petitioner must show the nature of the claim which was the actual basis for the settlement and that her settlement proceeds were in lieu of damages for physical injuries or physica l sickness .

Green received Social Security disability benefits of $13,495 . On their .2004 return petitioners~reported the $13,495 but did not report any amount of the $13,495 as taxable income, on the grounds that the benefits were excludable from income under section 104 .- C . Pension Income For 2004 .the State of California-filed a Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit- Sharing Plans, IRAs, Insurance Contracts, etc ., with the IRS that reported Mr . Green as .having r

Section 104, as is pertinent to this case, provides : , SEC . 104 . COMPENSATION FOR INJURIES OR SICKNESS . (a) In General .--Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc ., expenses)(cid:127)for any prior taxable year, gross income does not include-- (1) amounts

in income . Secs . 61(a)(9), (11), 72(a) . Generally, however, section 72 does not apply to any amount received as an accident or health benefit, sec . 1.72-15(b), Income Tax Regs ., and certain disability payments are excludable from income under section 104 . For this reason, petitioner seeks disability classification for the payments from DCPSS . Petitioner failed to convince DCPSS to reclassify the payments . Respondent determined that the payments constitute retirement annuity payments and

Whether the settlement payment is excludable from gross income under section 104 (a)(2) depends on the nature and the character of the claim asserted, and not upon the validity of that claim.

- 5 - On March 4, 2006, petitioners timely mailed and postmarked a petition disputing the $437 tax deficiency respondent had determined on the ground that the entire amount petitioner received in 2003 as Social Security disability benefits should be treated as nontaxable workmen's compensation benefits under section 104 (a) (1) .

Section 105(a) provides that amounts received by an employee through accident or health insurance for personal injuries or - 7 - sickness shall be included in gross income to the extent such amounts are (1) attributable to contributions by the employer and not includable in gross income of the employee, or (2) are paid by the employer.

All sums set forth herein constitute damages on account of personal injuries or sickness, within the meaning of Section 104 (a)(2) of the Internal Revenue Code of 1986, as amended.

y to the applicable regulations discussed below. The regulations under section 72 explain the applicability of section 72 to accident and health plans, as well as to distributions from profit sharing plans 9 In their petition, petitioners also cited sec. 104 in support of the alleged nontaxable nature of the disability payments. Since petitioners mentioned sec. 104 at trial only in their opening statement and did not address it on brief, the Court assumes that petitioners either have concluded t

he notice of deficiency, respondent did not determine that the $36,000 constituted gross income. In Commissioner v. Banks, 543 U.S. 426 (2005), the Supreme Court held that attorney’s fees in a settlement recovery that is excludable from income under sec. 104 constitute gross income. The attorney’s fees are deductible as an itemized deduction. Respondent did not move to increase the income determination to reflect the recent decision; therefore, the only issue is whether the $54,000 paid directly

We further find no evidence to support petitioner’s “new” argument that the pension distributions are excludable under section 104 for personal injuries petitioner allegedly sustained while he was employed.

Under the flush language of section 104, damages resulting from emotional distress are not excludable from income.

im to believe that he received no substantial payments for punitive damages and interest. Petitioner has not cited any substantial authority to support his argument that the entire amount received under the settlement agreement was excludable under section 104. Sec. 6662(d)(2)(B)(i). Though petitioner disclosed his receipt of the - 36 - payments and provided an explanation for the tax treatment of those payments on his returns for 1997, 1998, and 1999 (there was no statement or disclosure for 19

RT CHARLES E. AND NOEL K. BRADLEY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 19074-02. Filed September 26, 2005. Ps excluded $12 million of a $76 million settlement from gross income for the 1995 taxable year pursuant to sec. 104 (a)(2), I.R.C. R determined the $12 million was not excludable. Held: Ps are not entitled to exclude the $12 million settlement amount from gross income. Charles E. and Noel K. Bradley, pro sese. Robert E. Marum, for respondent. MEMORANDUM F

Discussion The parties stipulated that petitioners may not exclude any portion of the settlement from gross income under section 104 and that petitioners* net receipts of $293,356 are includable in gross income under section 61(a).

The second prong of this test "has since been extended to apply to the amended version of section 104, with the corresponding change that the second prong now requires proof that the personal injuries or sickness for which damages were received were physical in nature." Venable v.

104(i), 80 Stat. 1138. The relevant legislative history states that section 6343(b) “[authorizes] the Secretary of the Treasury or his delegate to return to its rightful owner any property which has been wrongfully levied upon by the United States.” H. Rept. 1884, 89th Cong., 2d Sess. (1966), 1966-2 C.B. 815, 860 (emphasis 9 Sec. 6343(b) provi

ns of section 165, during the examination petitioners argued that some injury or sickness was caused by the insurance company’s actions. Under this argument, petitioners contended that the $130,000 was excludable as payment for physical injury under section 104. - 7 - Following the examination, petitioners hired a tax lawyer to represent them and to proceed to Appeals for further consideration of the examining agent’s findings. The lawyer engaged by petitioners was qualified in litigation and ta

1677. Although Virginia State law made a distinction between industrial loan corporations and banks, the court noted that “peculiarities in individual state laws” are not controlling in the interpretation of section 104. Staunton Indus. Loan Corp. v. Commissioner, supra at 933. After analyzing the “sum total of * * * [taxpayer’s]

file computer in Martinsburg, W. Va. Assessment in Appealed Cases, Internal Revenue Manual (IRM) (RIA), sec. 35.13.10.3 (2002). 3 Nonmaster file assessments are processed manually through the service centers. Reference Guide: Examining Process, IRM, sec. 104.3.1-1 (2002). The taxpayer’s tax account record includes both master and nonmaster file assessments. Transcript of Account Defined, IRM, sec. 8.17.3.1.1 (2002). - 3 - Intent to Levy and Notice of your Right to a Hearing under sections 6331 a

of income)* * * . See also Bent v. Commissioner, 87 T.C. 236, 251 (1986) (and cases cited therein), affd. 835 F.2d 67 (3d Cir. 1987). Petitioners argue that the legal fees and costs were not attributable to the receipt of income that is exempted by section 104. Petitioner contends that his purpose in hiring the attorney 2(...continued) Tax Court Rules of Practice and Procedure, unless otherwise indicated. 3 Petitioners sought the deduction on Schedule A, Itemized Deductions, and, accordingly, t

heir trial memorandum, that petitioners' reference may be to section 105(e) relating to certain types of accident or health plans or employee sickness and disability funds that are treated as accident or health insurance plans within the meaning of sec. 104. The Court, therefore, will address petitioners' contention under sec. 105(e). - 3 - from the Hartford Life Insurance Co. These benefits were from a health and accident plan provided by petitioner's former employer. On their Federal income ta

en the cupboard doors were difficult to open. The kitchen cabinets started to 1 Unless otherwise stated, all section references are to the Internal Revenue Code in effect for the taxable year in issue. 2 Respondent also advanced arguments concerning sec. 104 because of petitioners’ references to that section in their briefs. Petitioners’ reference to the income exclusion principle of sec. 104 was merely by way of an analogy as a means to test the nature of the payment in order to show compliance

ations. However, given the considerable passage of time, some, if not all, of the bred heifers must have given birth during this time, and we believe this activity constitutes characterizes such acceptance as an adoption. See Restatement, Agency 2d, sec. 104 & comment (a) (1958). For these purposes, the labels are not significant. 6 The average gestation period for cattle is 284 days, with a variation range of 260-300 days. See 5 New Encyclopedia Britannica, Gestation 227 (15th ed. 1993). "It is

104, 104(i)(3), 80 Stat. 1539, 1561, redesignated the adjustment provision as sec. 819(a) for tax years beginning after 1966. From 1966 until 1983, sec. 819(a) remained unchanged except for minor changes, which are not relevant to the instant case. 14Sec. 813 provided in pertinent part: (a) Adjustment where surplus held in the United States is

104 (1989) defines alimony as "An order for support granted by this or any other state to a spouse or former spouse in conjunction with a decree granting a divorce or annulment." In the instant case, the agreement and subsequent divorce decree provide that the agreement is incorporated, not merged into the decree. Therefore, the agreement reta

104.1207 (1993). 4 Respondent states that she is unaware of any notices of deficiency or collection actions pending against petitioner other than the notices of deficiency for 1991 and 1992. Under the circumstances, we conclude that the Court's jurisdiction in this case is limited to petitioner's liability for the taxable years 1991 and 1992.