- 6 -
through a settlement agreement entered into in lieu of
such prosecution.
Thus, an amount may be excluded from gross income only when
it was received both: (1) through prosecution or settlement of an
action based upon tort or tort type rights; and (2) on account of
personal injuries or sickness. Commissioner v. Schleier, 515
U.S. at , 115 S. Ct. at 2166-2167; Wesson v. United States, 48
F.3d 894, 901-902 (5th Cir. 1995); Bagley v. Commissioner, 105
T.C. 396, 416 (1995).
Where damages are received pursuant to settlement
agreements, as is the case herein,4 the nature of the claims that
were the actual basis for settlement controls whether such
damages are excludable under section 104(a)(2). United States v.
Burke, 504 U.S. 229, 237 (1992); Robinson v. Commissioner, 102
T.C. 116, 126 (1994), affd. in part, revd. in part 70 F.3d 34
(5th Cir. 1995). "[T]he critical question is, in lieu of what
was the settlement amount paid?" Bagley v. Commissioner, supra
at 406.
4 In response to a concern of petitioners, we note that we
consider the release agreements to be settlements or settlement
agreements. See, e.g., Black's Law Dictionary at 1372 (6th ed.
1990) (defining "settle" as "A word of equivocal meaning; meaning
different things in different connections, and the particular
sense in which it is used may be explained by the context or the
circumstances"). In any event, whatever the semantical
description of the releases, the focus is on the actual terms of
the documents.
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