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settlement controls whether such damages are excludable under
section 104(a)(2). United States v. Burke, 504 U.S. 229, 237
(1992); Thompson v. Commissioner, 866 F.2d 709, 711 (4th Cir.
1989), affg. 89 T.C. 632 (1987); Robinson v. Commissioner, 102
T.C. 116, 126 (1994), affd. in part and 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.
Determination of the nature of the claim is factual. Bagley
v. Commissioner, supra; Stocks v. Commissioner, 98 T.C. 1, 11
(1992). If the settlement agreement lacks express language
stating what the settlement amount was paid to settle, then the
most important factor is the intent of the payor. Knuckles v.
Commissioner, 349 F.2d 610, 612 (10th Cir. 1965), affg. T.C.
Memo. 1964-33; Stocks v. Commissioner, supra at 10.
The first requirement is the existence of a claim "based
upon tort or tort type rights". Commissioner v. Schleier, supra
at 333. The claim must be bona fide, but not necessarily valid,
i.e., sustainable. Taggi v. United States, 35 F.3d 93, 96 (2d
Cir. 1994); Robinson v. Commissioner, 102 T.C. at 126; Stocks v.
Commissioner, supra at 10. Moreover, while it need not have been
previously asserted, the absence of any knowledge of the claim on
the part of the employer-payor obviously has a negative impact in
determining the requisite intent of the payment.
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