The IRS 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 reflect amendments made by the Small Business Job Protection Act of 1996 (P.L. 104-188) and affect taxpayers receiving damages on account of personal physical injuries or physical sickness and taxpayers paying these damages.
The final regulations adopt without substantive change proposed regulations (NPRM REG-127270-06) issued on September 15, 2009. The proposed regulations deleted 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 provided, instead, that the Code Sec. 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. These regulations are effective January 23, 2012, and 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 January 23, 2012. (T.D. 9573, January 20, 2012.)