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79 9 October 1996 Doctrine: Amount of any damages received (whether by suit or agreement and whether as um! sums or as !eriodic !ayments" on account of !ersona in#uries or sic$ness are e%c uded from gross income. &he damages are not ta%ab e. Facts: &he !etitioners in this case are the husband and two chi dren of a woman who died of to%ic shoc$ syndrome in 19'(. &hey received a #ury award of )1*5+5*,,, actua damages and )1, mi ion !unitive damages in a tort suit brought by -e y (!etitioner" based on -ansas aw against the ma$er of the !roduct that caused the death of .etty O/ 0i vie (-e y/s wife". -e y !aid federa income ta% insofar as the !roceeds re!resented !unitive damages* but immediate y he sought for a refund. 1etitioners/ concerns are ega entit ement to that refund. &he itigation re!resents the conso idation of two cases brought in the same 2edera 3istrict 4ourt5 the husband/s suit against the 0overnment for a refund* and the 0overnment suit against the chi dren to recover the refund that the 0overnment had made to the chi dren ear ier !rocedura y s!ea$ing. &he 2edera 3istrict 4ourt he d on the merits that the anguage found under +6 U.S.4. 6 1,7(a"(+"* e%c uded from the 8gross income9 the 8amount of any damages received . . . on account of !ersona in#ury or sic$ness:. &he statutory !hrase a so inc udes !unitive damages which entit e -e y to ac;uire and the chi dren to $ee!* their refund. <owever* the 4ourt of A!!ea s for the &enth 4ircuit* the 2ourth* =inth and 2edera 4ircuits reversed the 3istrict 4ourt/s decision. >t he d that the e%c usionary !rovision does not cover !unitive damages. Issue: 1. ?hether or not the !rovision a!! ies to !unitive damages received by the !etitioners in a tort suit for !ersona in#uries @ =O

evied by civi #uries to !unish re!rehensib e conduct and to deter its future occurrence. Boreover* the 0overnment says that such damages were not :received . . . on account of: the !ersona in#uries. .ut* such damages were awarded :on account of :a defendantAs re!rehensib e conduct and the #uryAs need to !unish and to deter it. &he 0overnment conc udes that these !unitive damages fa outside the statuteAs coverage* and the court agreed with the 0overnment/s inter!retation of the statute. >n Commissioner vs Schleier, 515 US 323, the court came to reso ving the statuteAs ambiguity in the 0overnmentAs favor. &he case did not invo ve damages received in an ordinary tort suit* but rather it invo ved i;uidated damages and bac$!ay received in a sett ement of a awsuit charging a vio ation of the Age 3iscrimination in Cm! oyment Act (A3CA". A3CA i;uidated damages are not covered* they are !unitive in nature. &hey are not designed to com!ensate A3CA victims. &hat the statute covers !ain and suffering damages* medica e%!enses* and ost wages in an ordinary tort case and e%c uded from income. &he court conc udes that !unitive damages are not covered because they are an e ement of damages and not :designed to com!ensate victims. <ence* they are !unitive in nature. A so* the court finds the 0overnmentAs reading more faithfu to the history of the statutory !rovision as we as the basic ta% re ated !ur!ose that the history revea s in which it e%c udes com!ensatory damages that restore a victim/s ost* nonta%ab e 8ca!ita 9. &he court as$ed why 4ongress might have wanted the e%c usion to have covered these !unitive damages* and they found no very good answer. &hose damages are not a substitute for any norma y unta%ed !ersona (or financia " ;ua ity* good* or :asset.: &hey do not com!ensate for any $ind of oss. 1etitioners ma$e three arguments to the contrary. <owever* they are not !ersuasive to defeat the 0overnment/s inter!retation. <is first argument does not overcome the court/s inter!retation of the !rovision in Schleier* nor does it change the !rovisionAs history. Second* !etitioners argue that the !ur!oses might have ed 4ongress to e%c ude ost wages from income wou d a so have ed 4ongress to e%c ude !unitive damages .&he court says that it is one of degree. &a% generosity !resumab y has its imits. &he e ement of !unitive award does not e%ist in the case* and the damages at issue are not a com!ensatory but entire y !unitive. Dast y* !etitioner re ied u!on a ater enacted aw. <owever* 4ongressA !rimary focus was u!on what to do about non!hysica !ersona in#uries* not u!on the !rovisionAs coverage of !unitive damages under !re@e%isting aw. !: M!"anna# Lou O. Di"aca$in%

Ratio: :amount of any damages received (whether by suit or agreement and whether as um! sums or as !eriodic !ayments" on account of personal injuries or sickness.: +6 U.S.4. 6 1,7(a"(+" (19'' ed." (em!hasis added". &he !unitive damages received by the !etitioners/ were not received :on account of: !ersona in#uries. &herefore* the !rovision* stated above* does not a!! y and the damages are ta%ab e. On the 0overnmentAs side* the !rovision is a!! icab e on y to those !ersona in#ury awsuit damages that were awarded by reason of* or because of* the !ersona in#uries. &hey wou d ma$e the section ina!! icab e to !unitive damages* where those damages are not com!ensation for in#ury but instead are !rivate fines