## Facts

- An individual taxpayer received amounts in settlement of a suit for damages for alienation of affections and in consideration for surrendering custody of the taxpayer’s minor child.
- The recovery related to personal or family rights rather than property rights, and the two components were treated together.
- None of the amounts received were exemplary or punitive damages.
- The question was whether the settlement proceeds were excludable from gross income as damages received on account of personal injuries under I.R.C. § 104(a)(2) and Treas. Reg. § 1.104-1 (as then in effect).

## Issues

1. Whether compensatory amounts received for alienation of affections and for surrender of custody of a minor child are excludable from gross income as damages received on account of personal injuries under I.R.C. § 104(a)(2) and Treas. Reg. § 1.104-1.
2. Whether the absence of punitive or exemplary damages is a condition for exclusion of such amounts under the IRS’s interpretation of former § 104(a)(2).

## Decision

- The IRS concluded the taxpayer may exclude from gross income the amounts received as damages for alienation of affections and for surrender of custody of the taxpayer’s minor child.
- The conclusion rested on treating the recovery as compensatory damages for injury to personal or family rights and on the fact that no portion was punitive.
- The ruling superseded a prior administrative position reaching the same result under earlier law.
- The ruling was later declared obsolete after statutory changes to § 104(a)(2) narrowed the exclusion.

## Legal Principles

- Under former I.R.C. § 104(a)(2), compensatory damages received on account of personal injuries could be excluded from gross income.
- Injuries to personal or family rights (including alienation of affections and child-custody-related harms) were treated as “personal injuries” for exclusion purposes under the IRS’s then-current interpretation.
- Amounts characterized as punitive or exemplary damages were not within the compensatory-damages exclusion contemplated by the ruling.
- Administrative guidance may be superseded or rendered obsolete when later-issued guidance restates the same rule under updated authority or when statutory amendments change the governing standard.

## Conclusion

The IRS determined that, under the then-applicable version of § 104(a)(2), a taxpayer could exclude from gross income compensatory settlement proceeds paid for alienation of affections and for surrendering custody of a minor child, so long as no part of the payment was punitive; the ruling’s continuing effect ended when later statutory changes narrowed the scope of the exclusion.


Rev. Rul. 74-77, 1974-1 C.B. 33 (1974)