The Internal Revenue Service has released final regulations relating to the exclusion from gross income for amounts received on account of personal physical injuries or physical sickness.
The final regulations in TD 9573 reflect amendments under the Small Business Job Protection Act of 1996 and affect taxpayers who have received damages on account of personal physical injuries or physical sickness and taxpayers paying these damages.
The regulations take effect on Jan. 23, 2012. They delete an earlier 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 regulations provide, instead, that the Section 104(a)(2) exclusion may apply to damages recovered for a personal physical injury or physical sickness under a statute that does not provide for a broad range of remedies, and that the injury need not be defined as a tort.
The regulations apply to damages paid pursuant to a written binding agreement, court decree, or mediation award entered into or issued after Sept. 13, 1995, and received after Jan. 23, 2012. This Sept. 13, 1995, effective date derives from an exception set forth in Section 1605(d)(2) of the 1996 Act to the statutory effective date of the amendments to Section 104(a)(2).
In addition, taxpayers may apply these regulations to amounts paid pursuant to a written binding agreement, court decree, or mediation award entered into or issued after Sept. 13, 1995, and received after Aug. 20, 1996, and if otherwise eligible may file a claim for refund for a taxable year for which the period of limitation on credit or refund under section 6511 has not expired.
To qualify for a refund of tax on damages paid after Aug. 20, 1996, under a written binding agreement, court decree, or mediation award entered into or issued after Sept. 13, 1995, a taxpayer must meet the requirements of the 1996 Act, including the requirement that excludable damages must be received on account of personal physical injuries.
