Damages Received on Account of Personal Physical Injuries or Physical Sickness, 47152-47154 [E9-22221]

Download as PDF 47152 Federal Register / Vol. 74, No. 177 / Tuesday, September 15, 2009 / Proposed Rules Using agency. USN, Naval Strike and Air Warfare Center, Fallon, NV. R–4804B * * Twin Peaks, NV [Amended] * * * By removing the current times of designation and using agency and substituting the following: Time of designation. Intermittent by NOTAM 0715 to 2330 local time daily; other times by NOTAM. Using agency. USN, Naval Strike and Air Warfare Center, Fallon, NV. * * R–4810 * * * * * * * By removing the current times of designation and using agency and substituting the following: Time of designation. 0715 to 2330 local time daily; other times by NOTAM Using agency. USN, Naval Strike and Air Warfare Center, Fallon, NV. * * * * * R–4812 Sand Springs, NV [Amended] By removing the current times of designation and using agency and substituting the following: Time of designation. 0715 to 2330 local time daily; other times by NOTAM Using agency. USN, Naval Strike and Air Warfare Center, Fallon, NV. R–4813A * * Carson Sink, NV [Amended] * * * By removing the current times of designation and using agency and substituting the following: Time of designation. 0715 to 2330 local time daily; other times by NOTAM Using agency. USN, Naval Strike and Air Warfare Center, Fallon, NV. R–4813B * * Carson Sink, NV [Amended] * * * By removing the current times of designation and using agency and substituting the following: Time of designation. Intermittent by NOTAM 0715 to 2330 local time daily; other times by NOTAM. Using agency. USN, Naval Strike and Air Warfare Center, Fallon, NV. R–4816N * * Dixie Valley, NV [Amended] * * * By removing the current times of designation and using agency and substituting the following: Time of designation. 0715 to 2330 local time daily; other times by NOTAM Using agency. USN, Naval Strike and Air Warfare Center, Fallon, NV. sroberts on DSKD5P82C1PROD with PROPOSALS R–4816S * * Dixie Valley, NV [Amended] * * * By removing the current times of designation and using agency and substituting the following: Time of designation. 0715 to 2330 local time daily; other times by NOTAM Using agency. USN, Naval Strike and Air Warfare Center, Fallon, NV. * * * VerDate Nov<24>2008 * * 16:55 Sep 14, 2009 BILLING CODE 4910–13–P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 Desert Mountains, NV [Amended] * Issued in Washington, DC, on September 2, 2009. Edith V. Parish, Manager, Airspace and Rules Group. [FR Doc. E9–22139 Filed 9–14–09; 8:45 am] Jkt 217001 [REG–127270–06] RIN 1545–BF81 Damages Received on Account of Personal Physical Injuries or Physical Sickness AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking. SUMMARY: This document contains proposed regulations relating to the exclusion from gross income for amounts received on account of personal physical injuries or physical sickness. The proposed regulations reflect amendments under the Small Business Job Protection Act of 1996. The proposed regulations also delete the requirement that to qualify for exclusion from gross income, damages received from a legal suit, action, or settlement agreement must be based upon ‘‘tort or tort type rights.’’ The proposed regulations affect taxpayers receiving damages on account of personal physical injuries or physical sickness and taxpayers paying these damages. DATES: Written (paper or electronic) comments must be received by December 14, 2009. ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–127270–06), room 5203, Internal Revenue Service, Post Office Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG–127270– 06), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC, or sent electronically via the Federal eRulemaking Portal at https:// www.regulations.gov (IRS REG–127270– 06). FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Sheldon A. Iskow, (202) 622–4920 (not a toll-free number); concerning the submission of comments and/or requests for a public hearing, Richard Hurst at Richard.A.Hurst@irscounsel.treas.gov. PO 00000 Frm 00029 Fmt 4702 Sfmt 4702 SUPPLEMENTARY INFORMATION: Background and Explanation of Provisions This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) to reflect amendments made to section 104(a)(2) of the Internal Revenue Code (Code) by section 1605(a) and (b) of the Small Business Job Protection Act of 1996, Public Law 104–188, (110 Stat. 1838 (the 1996 Act)), and to delete the ‘‘tort or tort type rights’’ test under § 1.104– 1(c) of the Income Tax Regulations. As amended, section 104(a)(2) excludes from gross income 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. These proposed regulations conform the regulations to these statutory amendments and clarify the changes for taxpayers and practitioners. 1. The 1996 Act Amendments Section 1605(a) of the 1996 Act amended section 104(a)(2) to provide expressly that punitive damages do not qualify for the income exclusion. The amendment was a response to divergent court opinions, some holding that punitive damages are received ‘‘on account of’’ a personal injury. See H.R. Conf. Rept. 104–737 (1996) at 301. The amendment is consistent with O’Gilvie v. United States, 519 U.S. 79 (1996), holding that punitive damages are not compensation for personal injuries and do not satisfy the ‘‘on account of’’ test under section 104(a)(2). Section 1605(a) also amended section 104(a)(2) to provide that the income exclusion generally is limited to amounts received on account of personal ‘‘physical’’ injuries or ‘‘physical’’ sickness. Section 1605(b) of the 1996 Act further amended section 104(a) to provide that, for purposes of section 104(a)(2), even though emotional distress is not considered a physical injury or a physical sickness, damages not in excess of the amount paid for ‘‘medical care’’ (described in section 213(d)(1)(A) or (B)) for emotional distress are excluded from income. The proposed regulations reflect these statutory amendments. The proposed regulations also provide that a taxpayer may exclude damages received for emotional distress ‘‘attributable’’ to a physical injury or physical sickness. See H.R. Conf. Rept. 104–737 (1996) at 301. E:\FR\FM\15SEP1.SGM 15SEP1 Federal Register / Vol. 74, No. 177 / Tuesday, September 15, 2009 / Proposed Rules 2. The Tort Type Rights Test The proposed regulations also eliminate the requirement that ‘‘personal injuries or sickness’’ be ‘‘based upon tort or tort type rights.’’ That requirement in § 1.104–1(c) was intended to ensure that only damages compensating for torts and similar personal injuries qualify for exclusion under section 104(a)(2). In United States v. Burke, 504 U.S. 229 (1992), the Supreme Court interpreted the tort type rights test as limiting the section 104(a)(2) exclusion to damages for personal injuries for which the full range of tort-type remedies is available. The Court held that section 104(a)(2) did not apply to an award of back pay under the pre-1991 version of Title VII of the 1964 Civil Rights Act because the damages awarded under the statute provided only a narrow remedy and thus did not compensate for a tort type injury. The Burke interpretation precluded section 104(a)(2) treatment for similar personal injuries redressed by ‘‘no-fault’’ statutes that do not provide traditional tort-type remedies. Many critics thought the Burke remedies test was too restrictive. Later legislative and judicial developments eliminated the need to base the section 104(a)(2) exclusion on tort and remedies concepts. First, Commissioner v. Schleier, 515 U.S. 323 (1995), interpreted the statutory ‘‘on account of’’ test as excluding only damages directly linked to ‘‘personal’’ injuries or sickness. Second, the 1996 Act restricts the exclusion to damages for ‘‘personal physical’’ injuries or ‘‘physical sickness.’’ Accordingly, under the proposed regulations, damages for physical injuries may qualify for the section 104(a)(2) exclusion even though the injury giving rise to the damages is not defined as a tort under state or common law. Nor does the section 104(a)(2) exclusion depend on the scope of remedies available under state or common law. In effect, the regulations reverse the result in Burke by allowing the exclusion for damages awarded under no-fault statutes. sroberts on DSKD5P82C1PROD with PROPOSALS Proposed Effective/Applicability Date These regulations are proposed to apply to damages paid pursuant to a written binding agreement, court decree, or mediation award entered into or issued after September 13, 1995, and received after the date these regulations are published as final regulations in the Federal Register. However, taxpayers may apply these proposed regulations to amounts paid pursuant to a written binding agreement, court decree, or VerDate Nov<24>2008 16:55 Sep 14, 2009 Jkt 217001 mediation award entered into or issued after September 13, 1995, and received after August 20, 1996. If applying the proposed regulations to damages received after August 20, 1996, results in an overpayment of tax, the taxpayer may file a claim for refund within the period of limitations under section 6511. Notwithstanding the date these regulations are proposed to become effective, the 1996 Act amendments to section 104(a)(2), including the amendment restricting the exclusion to amounts received on account of personal physical injuries or physical sickness, are effective for amounts received after August 20, 1996, except for any amount received under a written binding agreement, court decree, or mediation award in effect on (or issued on or before) September 13, 1995. Since the 1996 Act amendments, courts have applied the statutory effective date in holding that amounts received on account of nonphysical injuries are not excludable. Hennessey v. Commissioner, T.C. Memo 2009–132; Green v. Commissioner, T.C. Memo 2007–39. These regulations propose to conform existing regulations to amended section 104(a)(2). To the extent that existing regulations conflict with amended section 104(a)(2), the statute controls. See Murphy v. Internal Revenue Service, 493 F.3d 170, 176 n* (D.C. Cir. 2007). Special Analyses It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. Comments and Requests for a Public Hearing Before these proposed regulations are adopted as final regulations, consideration will be given to any written (either a signed paper original with eight (8) copies) or electronic comments that are submitted timely to the IRS. The IRS and the Treasury Department specifically request PO 00000 Frm 00030 Fmt 4702 Sfmt 4702 47153 comments on the clarity of the proposed rules and how they can be made easier to understand. All comments will be available for public inspection and copying. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time and place for the hearing will be published in the Federal Register. Drafting Information The principal author of these regulations is Sheldon A. Iskow of the Office of Associate Chief Counsel (Income Tax and Accounting). However, other personnel from the IRS and Treasury Department participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is proposed to be amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 2. In § 1.104–1, paragraph (c) is revised to read as follows: § 1.104–1 Compensation for injuries or sickness. * * * * * (c) Damages received on account of personal physical injuries or physical sickness—(1) In general. Section 104(a)(2) excludes from gross income 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. Emotional distress is not considered a physical injury or physical sickness. However, damages for emotional distress attributable to a physical injury or physical sickness are excluded from income under section 104(a)(2). Section 104(a)(2) also excludes damages not in excess of the amount paid for medical care (described in section 213(d)(1)(A) or (B)) for emotional distress. For purposes of this paragraph (c), the term damages means an amount received (other than workers’ compensation) through prosecution of a legal suit or action, or through a settlement agreement entered into in lieu of prosecution. E:\FR\FM\15SEP1.SGM 15SEP1 47154 Federal Register / Vol. 74, No. 177 / Tuesday, September 15, 2009 / Proposed Rules (2) Cause of action and remedies. The section 104(a)(2) exclusion may apply to damages recovered for a physical personal injury or sickness under a statute, even if that statute does not provide for a broad range of remedies. The injury need not be defined as a tort under state or common law. (3) Effective/applicability date. This paragraph (c) applies to damages paid pursuant to a written binding agreement, court decree, or mediation award entered into or issued after September 13, 1995, and received after the date these regulations are published as final regulations in the Federal Register. Taxpayers also may apply these proposed regulations to damages paid pursuant to a written binding agreement, court decree, or mediation award entered into or issued after September 13, 1995, and received after August 20, 1996. If applying these proposed regulations to damages received after August 20, 1996, results in an overpayment of tax, the taxpayer may file a claim for refund before the period of limitations under section 6511 expires. Notwithstanding the date these regulations are proposed to become effective, the statutory amendments to section 104(a) under section 1605 of the Small Business Job Protection Act of 1996, Public Law 104–188, (110 Stat. 1838), are effective for amounts received after August 20, 1996, except for any amount received under a written binding agreement, court decree, or mediation award in effect on (or issued on or before) September 13, 1995. * * * * * Linda E. Stiff, Deputy Commissioner for Services and Enforcement. [FR Doc. E9–22221 Filed 9–14–09; 8:45 am] BILLING CODE 4830–01–P ENVIRONMENTAL PROTECTION AGENCY 40 CFR Part 52 [EPA–R10–OAR–2008–0690; FRL–8956–7] Approval and Promulgation of State Implementation Plans: Alaska Environmental Protection Agency (EPA). ACTION: Proposed rule. sroberts on DSKD5P82C1PROD with PROPOSALS AGENCY: SUMMARY: The EPA is proposing to approve numerous revisions to Alaska’s State Implementation Plan (SIP) relating to the motor vehicle inspection and maintenance program for control of carbon monoxide (CO) in Anchorage VerDate Nov<24>2008 16:55 Sep 14, 2009 Jkt 217001 and Fairbanks. The State of Alaska submitted three revisions to the Alaska SIP: a March 29, 2002 submittal containing minor revisions to the Statewide Inspection and Maintenance Program, a December 11, 2006 submittal containing more substantial revisions to the Statewide Inspection and Maintenance Program, and a June 5, 2008 submittal containing major revisions to the Statewide Inspection and Maintenance Program discontinuing the Inspection and Maintenance Program in Fairbanks as an active control measure in the SIP and shifting it to contingency measures. EPA is proposing to approve these submittals because they satisfy the requirements of the Clean Air Act (hereinafter the Act or CAA). Also in this action, EPA is proposing a technical correction to the boundary description for the Fairbanks CO maintenance area, to correct a transcription error in the boundary description. DATES: Written comments must be received on or before October 15, 2009. ADDRESSES: Submit your comments, identified by Docket ID No. EPA–R10– OAR–2008–0690, by one of the following methods: A. https://www.regulations.gov. Follow the on-line instructions for submitting comments. B. Mail: Gina Bonifacino, EPA, Office of Air, Waste, and Toxics (AWT–107), 1200 Sixth Avenue, Suite 900, Seattle, Washington 98101. C. Hand Delivery: EPA, Region 10 Mailroom, 9th Floor, 1200 Sixth Avenue, Seattle, Washington 98101. Attention: Gina Bonifacino, Office of Air Waste, and Toxics (AWT–107). Such deliveries are only accepted during normal hours of operation, and special arrangements should be made for deliveries of boxed information. Instructions: Direct your comments to Docket ID No. EPA–R10–OAR–2008– 0690. The EPA’s policy is that all comments received will be included in the public docket without change and may be made available online at https://www.regulations.gov, including any personal information provided, unless the comment includes information claimed to be Confidential Business Information (CBI) or other information whose disclosure is restricted by statute. Do not submit information that you consider to be CBI or otherwise protected through https:// www.regulations.gov or e-mail. The https://www.regulations.gov Web site is an ‘‘anonymous access’’ system, which means the EPA will not know your identity or contact information unless PO 00000 Frm 00031 Fmt 4702 Sfmt 4702 you provide it in the body of your comment. If you send an e-mail comment directly to the EPA without going through https:// www.regulations.gov, your e-mail address will be automatically captured and included as part of the comment that is placed in the public docket and made available on the Internet. If you submit an electronic comment, the EPA recommends that you include your name and other contact information in the body of your comment and with any disk or CD–ROM you submit. If the EPA cannot read your comment due to technical difficulties and cannot contact you for clarification, the EPA may not be able to consider your comment. Electronic files should avoid the use of special characters, any form of encryption, and be free of any defects or viruses. Docket: All documents in the electronic docket are listed in the https://www.regulations.gov index. Although listed in the index, some information is not publicly available, i.e., CBI or other information whose disclosure is restricted by statute. Certain other material, such as copyrighted material is not placed on the Internet and will be publicly available only in hard copy form. Publicly available docket materials are available either electronically in https:// www.regulations.gov or in hard copy during normal business hours at the Office of Air, Waste and Toxics, EPA Region 10, 1200 Sixth Avenue, Seattle, Washington 98101. FOR FURTHER INFORMATION CONTACT: Gina Bonifacino, (206) 553–2970, or by e-mail at R10-Public_Comments@epa.gov. SUPPLEMENTARY INFORMATION: Throughout this document whenever ‘‘we,’’ ‘‘us,’’ or ‘‘our’’ is used, we mean the EPA. Information is organized as follows: Table of Contents I. Background II. Proposed Actions A. 2008 Submittal B. 2006 Submittal C. 2002 Submittal D. 110(k)(6) Correction III. Statutory and Executive Order Reviews I. Background Fairbanks North Star Borough Maintenance Area Planning History The urban portion of the Fairbanks North Star Borough (FNSB or Fairbanks) was designated in 1990 as a nonattainment area for CO and classified as moderate. On March 30, 1998, Fairbanks was reclassified as a serious nonattainment area for failing to attain the ambient eight-hour CO E:\FR\FM\15SEP1.SGM 15SEP1

Agencies

[Federal Register Volume 74, Number 177 (Tuesday, September 15, 2009)]
[Proposed Rules]
[Pages 47152-47154]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-22221]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-127270-06]
RIN 1545-BF81


Damages Received on Account of Personal Physical Injuries or 
Physical Sickness

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: This document contains proposed regulations relating to the 
exclusion from gross income for amounts received on account of personal 
physical injuries or physical sickness. The proposed regulations 
reflect amendments under the Small Business Job Protection Act of 1996. 
The proposed regulations also delete the requirement that to qualify 
for exclusion from gross income, damages received from a legal suit, 
action, or settlement agreement must be based upon ``tort or tort type 
rights.'' The proposed regulations affect taxpayers receiving damages 
on account of personal physical injuries or physical sickness and 
taxpayers paying these damages.

DATES: Written (paper or electronic) comments must be received by 
December 14, 2009.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-127270-06), room 
5203, Internal Revenue Service, Post Office Box 7604, Ben Franklin 
Station, Washington, DC 20044. Submissions may be hand delivered Monday 
through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR 
(REG-127270-06), Courier's Desk, Internal Revenue Service, 1111 
Constitution Avenue, NW., Washington, DC, or sent electronically via 
the Federal eRulemaking Portal at https://www.regulations.gov (IRS REG-
127270-06).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Sheldon A. Iskow, (202) 622-4920 (not a toll-free number); concerning 
the submission of comments and/or requests for a public hearing, 
Richard Hurst at Richard.A.Hurst@irscounsel.treas.gov.

SUPPLEMENTARY INFORMATION: 

Background and Explanation of Provisions

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) to reflect amendments made to section 
104(a)(2) of the Internal Revenue Code (Code) by section 1605(a) and 
(b) of the Small Business Job Protection Act of 1996, Public Law 104-
188, (110 Stat. 1838 (the 1996 Act)), and to delete the ``tort or tort 
type rights'' test under Sec.  1.104-1(c) of the Income Tax 
Regulations.
    As amended, section 104(a)(2) excludes from gross income 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. These 
proposed regulations conform the regulations to these statutory 
amendments and clarify the changes for taxpayers and practitioners.

1. The 1996 Act Amendments

    Section 1605(a) of the 1996 Act amended section 104(a)(2) to 
provide expressly that punitive damages do not qualify for the income 
exclusion. The amendment was a response to divergent court opinions, 
some holding that punitive damages are received ``on account of'' a 
personal injury. See H.R. Conf. Rept. 104-737 (1996) at 301. The 
amendment is consistent with O'Gilvie v. United States, 519 U.S. 79 
(1996), holding that punitive damages are not compensation for personal 
injuries and do not satisfy the ``on account of'' test under section 
104(a)(2).
    Section 1605(a) also amended section 104(a)(2) to provide that the 
income exclusion generally is limited to amounts received on account of 
personal ``physical'' injuries or ``physical'' sickness. Section 
1605(b) of the 1996 Act further amended section 104(a) to provide that, 
for purposes of section 104(a)(2), even though emotional distress is 
not considered a physical injury or a physical sickness, damages not in 
excess of the amount paid for ``medical care'' (described in section 
213(d)(1)(A) or (B)) for emotional distress are excluded from income.
    The proposed regulations reflect these statutory amendments. The 
proposed regulations also provide that a taxpayer may exclude damages 
received for emotional distress ``attributable'' to a physical injury 
or physical sickness. See H.R. Conf. Rept. 104-737 (1996) at 301.

[[Page 47153]]

2. The Tort Type Rights Test

    The proposed regulations also eliminate the requirement that 
``personal injuries or sickness'' be ``based upon tort or tort type 
rights.'' That requirement in Sec.  1.104-1(c) was intended to ensure 
that only damages compensating for torts and similar personal injuries 
qualify for exclusion under section 104(a)(2). In United States v. 
Burke, 504 U.S. 229 (1992), the Supreme Court interpreted the tort type 
rights test as limiting the section 104(a)(2) exclusion to damages for 
personal injuries for which the full range of tort-type remedies is 
available. The Court held that section 104(a)(2) did not apply to an 
award of back pay under the pre-1991 version of Title VII of the 1964 
Civil Rights Act because the damages awarded under the statute provided 
only a narrow remedy and thus did not compensate for a tort type 
injury. The Burke interpretation precluded section 104(a)(2) treatment 
for similar personal injuries redressed by ``no-fault'' statutes that 
do not provide traditional tort-type remedies. Many critics thought the 
Burke remedies test was too restrictive.
    Later legislative and judicial developments eliminated the need to 
base the section 104(a)(2) exclusion on tort and remedies concepts. 
First, Commissioner v. Schleier, 515 U.S. 323 (1995), interpreted the 
statutory ``on account of'' test as excluding only damages directly 
linked to ``personal'' injuries or sickness. Second, the 1996 Act 
restricts the exclusion to damages for ``personal physical'' injuries 
or ``physical sickness.''
    Accordingly, under the proposed regulations, damages for physical 
injuries may qualify for the section 104(a)(2) exclusion even though 
the injury giving rise to the damages is not defined as a tort under 
state or common law. Nor does the section 104(a)(2) exclusion depend on 
the scope of remedies available under state or common law. In effect, 
the regulations reverse the result in Burke by allowing the exclusion 
for damages awarded under no-fault statutes.

Proposed Effective/Applicability Date

    These regulations are proposed to apply to damages paid pursuant to 
a written binding agreement, court decree, or mediation award entered 
into or issued after September 13, 1995, and received after the date 
these regulations are published as final regulations in the Federal 
Register. However, taxpayers may apply these proposed regulations to 
amounts paid pursuant to a written binding agreement, court decree, or 
mediation award entered into or issued after September 13, 1995, and 
received after August 20, 1996. If applying the proposed regulations to 
damages received after August 20, 1996, results in an overpayment of 
tax, the taxpayer may file a claim for refund within the period of 
limitations under section 6511.
    Notwithstanding the date these regulations are proposed to become 
effective, the 1996 Act amendments to section 104(a)(2), including the 
amendment restricting the exclusion to amounts received on account of 
personal physical injuries or physical sickness, are effective for 
amounts received after August 20, 1996, except for any amount received 
under a written binding agreement, court decree, or mediation award in 
effect on (or issued on or before) September 13, 1995. Since the 1996 
Act amendments, courts have applied the statutory effective date in 
holding that amounts received on account of nonphysical injuries are 
not excludable. Hennessey v. Commissioner, T.C. Memo 2009-132; Green v. 
Commissioner, T.C. Memo 2007-39. These regulations propose to conform 
existing regulations to amended section 104(a)(2). To the extent that 
existing regulations conflict with amended section 104(a)(2), the 
statute controls. See Murphy v. Internal Revenue Service, 493 F.3d 170, 
176 n* (D.C. Cir. 2007).

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It also has 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations, and because 
the regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Internal Revenue Code, this 
notice of proposed rulemaking will be submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (either a signed paper 
original with eight (8) copies) or electronic comments that are 
submitted timely to the IRS. The IRS and the Treasury Department 
specifically request comments on the clarity of the proposed rules and 
how they can be made easier to understand. All comments will be 
available for public inspection and copying.
    A public hearing will be scheduled if requested in writing by any 
person that timely submits written comments. If a public hearing is 
scheduled, notice of the date, time and place for the hearing will be 
published in the Federal Register.

Drafting Information

    The principal author of these regulations is Sheldon A. Iskow of 
the Office of Associate Chief Counsel (Income Tax and Accounting). 
However, other personnel from the IRS and Treasury Department 
participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *

    Par. 2. In Sec.  1.104-1, paragraph (c) is revised to read as 
follows:


Sec.  1.104-1  Compensation for injuries or sickness.

* * * * *
    (c) Damages received on account of personal physical injuries or 
physical sickness--(1) In general. Section 104(a)(2) excludes from 
gross income 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. Emotional distress is not considered a physical injury or 
physical sickness. However, damages for emotional distress attributable 
to a physical injury or physical sickness are excluded from income 
under section 104(a)(2). Section 104(a)(2) also excludes damages not in 
excess of the amount paid for medical care (described in section 
213(d)(1)(A) or (B)) for emotional distress. For purposes of this 
paragraph (c), the term damages means an amount received (other than 
workers' compensation) through prosecution of a legal suit or action, 
or through a settlement agreement entered into in lieu of prosecution.

[[Page 47154]]

    (2) Cause of action and remedies. The section 104(a)(2) exclusion 
may apply to damages recovered for a physical personal injury or 
sickness under a statute, even if that statute does not provide for a 
broad range of remedies. The injury need not be defined as a tort under 
state or common law.
    (3) Effective/applicability date. This paragraph (c) applies to 
damages paid pursuant to a written binding agreement, court decree, or 
mediation award entered into or issued after September 13, 1995, and 
received after the date these regulations are published as final 
regulations in the Federal Register. Taxpayers also may apply these 
proposed regulations to damages paid pursuant to a written binding 
agreement, court decree, or mediation award entered into or issued 
after September 13, 1995, and received after August 20, 1996. If 
applying these proposed regulations to damages received after August 
20, 1996, results in an overpayment of tax, the taxpayer may file a 
claim for refund before the period of limitations under section 6511 
expires.
    Notwithstanding the date these regulations are proposed to become 
effective, the statutory amendments to section 104(a) under section 
1605 of the Small Business Job Protection Act of 1996, Public Law 104-
188, (110 Stat. 1838), are effective for amounts received after August 
20, 1996, except for any amount received under a written binding 
agreement, court decree, or mediation award in effect on (or issued on 
or before) September 13, 1995.
* * * * *

Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
[FR Doc. E9-22221 Filed 9-14-09; 8:45 am]
BILLING CODE 4830-01-P
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