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This article examines Section 104(a)(2) of the Internal Revenue Code and the litigation that has centered on the applicability of this Section to payments in settlement or other resolution of employment-related disputes arising out of an employment relationship and accompanied by charges of tortious conduct leveled at one or more of the parties. Part II reviews the origin of amounts received as damages on account of non-physical injuries. Part III analyzes the application of Section 104(a)(2) focusing on how courts have often blurred the distinction between what non-physical injuries are encompassed by the term “personal injury,” and whether a taxpayer has borne the burden of establishing that a settlement or an award was received on account of personal injuries. Part IV offers policy-based limitations for Section 104(a)(2).

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