Rev. Rul. 61-1

Advice has been requested as to the Federal income tax consequence of the election by a railroad employee to apportion part of an amount received in settlement of a claim for personal injuries to `time lost' for the purpose of acquiring railroad retirement credit for the time absent from work as a result of the injuries.

The taxpayer, a railroad employee, sustained personal injuries in the course of his employment and, as a result thereof, was unable to work for a period of time.

As a result of negotiations with the railroad, the taxpayer signed a settlement agreement releasing the company from all liability for the injuries he sustained and, in return therefor, received a amount of money from the company. In accepting such payment, the taxpayer elected, by separate agreement, to apportion part of the amount to `time lost' in order to receive railroad retirement credit for the time he was incapacitated.

Section 104(a)(2) of the Internal Revenue Code of 1954 provides that gross income does not include the amount of any damages received (whether by suit or agreement) on account of personal injuries or sickness, to the extent that such amounts are not attributable to deductions for medical expenses taken by the taxpayer in a prior year.

Section 1.104-1(c) of the Income Tax Regulations provides, in part, that the term `damages received (whether by suit or agreement)' means an amount received, other than workmen's compensation, through prosecution of a legal suit or action based upon tort or tort-type of rights, or through a settlement agreement entered into in lieu of such prosecution.

Section 3231(e)(1) of the Railroad Retirement Tax Act (chapter 22, subtitle C, Internal Revenue Code of 1954) provides, in part, that the term `compensation' includes remuneration paid for time lost as an employee.

In the instant case, it is held that the amount received by the taxpayer was in settlement of any and all claims which he had against the railroad for the personal injuries he sustained and is, therefore, excludable from gross income under section 104(a)(2) of the Code. The fact that in this case `time lost payments' constitute compensation for the purposes of taxes imposed by the Railroad Retirement Tax Act is not controlling for Federal income tax purposes.