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Click here for the full text of this decision FACTS:In March 1989, Rogelio (Roger) Benavides was working as a shift operator for American Chrome & Chemical (ACC) when he fell through an improperly maintained tank lid and into a tank of an extremely caustic chemical. He died as a result of the accident. Roger was survived by his wife Linda and their two minor children, Paul and David. Linda filed for and received workers’ compensation death benefits from Roger’s employer, which subscribed to the Texas Workers’ Compensation insurance system. Linda also filed a wrongful death suit on behalf of herself and the minor children against ACC in state court. The suit sought only punitive damages, because, although a plaintiff ordinarily may recover both compensatory and punitive damages in a wrongful death action under Texas law, the Texas Workers’ Compensation Act (WCA) limits the recovery available in wrongful death actions to only punitive damages when the decedent was covered by workers’ compensation insurance. Thus, as Roger had not waived his coverage under the WCA, Linda and the children were limited to recovering punitive damages in their wrongful death action. After some 10 years of litigation, the Benavides family prevailed at a jury trial in March 1999. The jury found that gross negligence caused Roger’s death, and it awarded the family $25 million in punitive damages. Before the entry of judgment on the jury’s verdict, the family accepted a settlement that reduced the punitive damages award and apportioned the recovery 50 percent to Linda and 25 percent to each child. The Benavides family paid federal income taxes on the award for 1999. In January 2001, Linda filed a refund claim for herself in the amount of $1,341,355 and for her children, Paul and David, in the amounts of $664,312 and $665,921, respectively. The Internal Revenue Service denied the refunds. In October 2004, the family filed suit in the district court challenging the denial of their refund claims. They asserted that they were entitled to a refund because, under 26 U.S.C. �104(c), they could exclude their punitive damages award from their gross income. Although gross income normally includes punitive damages, �104(c) creates an exception by exempting punitive damages obtained in wrongful death actions with respect to which applicable state law limits recovery to punitive damages. The family contended that the punitive damages in their case fell within this exception. The district court rejected this argument, holding that “[t]he Texas Wrongful Death Act, as applied in the present case, does not meet the exception of Section 104(c), because a plaintiff can maintain an action that is not a punitive damage action.” The court observed, “[t]he available compensatory remedies are either workers’ compensation payments or, if workers’ compensation is declined by a decedent, a common law action.” The Benavides family appealed. HOLDING:Affirmed. As a general rule, the court stated, gross income includes “all income from whatever source derived.” The court noted that “[t]he Supreme Court has repeatedly emphasized the sweeping scope of this definition, holding that Congress intended section 61(a), as well as its statutory predecessors, to exert the”full measure of its taxing power.’” Therefore, the court stated that “exclusions from gross income must be construed narrowly.” In 1996, the court stated that Congress amended �104 in an attempt to clarify the types of damages included in gross income. Under the amended 26 U.S.C. �104(a)(2), the court stated, individuals who have received both compensatory and punitive damages may exclude from gross income the compensatory damages received on account of personal physical injury or physical sickness. Thus, only part of their total award is taxed. Congress recognized, however, that some jurisdictions allow wrongful death claimants to recover only punitive damages. Under such circumstances, successful plaintiffs would have their entire recovery taxed, even though the punitive damages award would likely have some compensatory purpose in punitive-only jurisdictions. To avoid this inequity, Congress enacted �104(c), which applies the previous version of the law in certain cases. The Benavides family contended that the district court erred in concluding that their punitive damages award did not fall under �104(c). The government responded that the court should reject the family’s interpretation of �104(c), because the applicable state law (arguably, Texas’ wrongful death statute) allows plaintiffs to recover both compensatory and punitive damages. Interpreting �104(c) narrowly, the court agreed with the government that applicable law referred to the state’s wrongful death law. The Texas state law applicable to wrongful death actions, the court stated, does not restrict the recovery of successful plaintiffs only to punitive damages. Rather, it is Texas’ Workers’ Compensation Act that limits recovery to punitive damages and then only to those plaintiffs who recover workers’ compensation benefits for the wrongful death of a covered worker. Mindful that “exclusions from gross income must be construed narrowly,” the court held that �104(c) does not apply “when the state law governing wrongful death actions provides that a plaintiff may recover both punitive damages and compensatory damages, even if some other law of the state, such as the Workers’ Compensation Act here, limits some wrongful death plaintiffs from recovering punitive damages.” OPINION:Wiener, J.; Higginbotham, Wiener and Prado, JJ.

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