IRC Section 104 announcement reviewed by Attorney Rob Wood

In this weeks Speaking of Settlements, Mark Wahlstrom and Rob Wood discuss the recently announced clarification by the US Treasury/IRS on the 1996 tax law change to IRC section 104 and section 130.

A long time to wait for not a lot of excitment according to Rob, who says that while the clarification is certainly welcome, it's not the big game changing liberalization of section 104 that some people are making it out to be.

No reason to type a long discussion, just read Rob's brief summation here:


In September 2009, the Treasury Department issued Proposed
Regulations under Section 104, attempting to reflect the 1996 Act
statutory changes. See Prop. Treas. Reg. § 127270-06, available at
Section_127270-06.pdf. The Proposed Regulations state that it is not
necessary to satisfy the first the test enunciated in Commissioner v.
Schleier, 515 U.S. 323 (1995). They also state that it is no longer
relevant whether the remedial scheme under which the damages were
awarded is tort-like in scope.

In effect, the Proposed Regulations say they are reversing the result
in United States v. Burke, 504 U.S. 229 (1992). According to the
Preamble to these Proposed Regulations, after Burke, the Schleier
Court sought to verify the presence of tort or tort-type rights. The
effort, said the IRS, was to attempt to ensure that the damages were
paid for personal injuries.

Since the 1996 Act (post-Schleier) made clear that the injury must be
physical (which by definition must be personal), the Proposed
Regulations take the view that there is no need for the first part of the
Schleier test. The Proposed Regulations are proposed to apply to
damages received after they are published as Final Regulations.
However, taxpayers are allowed to apply these Proposed Regulations
currently, generally for damages received after August 20, 1996.
Claims for refund for such tax years may even be allowed.

Comment: Although this is a liberalizing change which is welcome,
the practical impact may not be too significant. In fact, few taxpayers
were tripped up by the tort or tort-type rights test. If taxpayers have
a problem, it is usually with the “on account of” and “physical”
issues. Unfortunately, the Proposed Regulations do not seek to
explain what constitutes a physical injury or physical sickness.

Posted on September 21, 2009 .