Joyce M. and Thomas J. Hamm - Page 8

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          received "on account of personal injuries or sickness".  Sec.               
          104(a)(2); Commissioner v. Schleier, supra at 337.                          
               Where amounts are received pursuant to a settlement                    
          agreement, the nature of the claim that was the actual basis for            
          settlement controls whether such amounts are excludable from                
          gross income pursuant to section 104(a)(2).  United States v.               
          Burke, 504 U.S. 229, 237 (1992).  The critical question is "in              
          lieu of what were damages awarded" or paid.  Bent v.                        
          Commissioner, 87 T.C. 236, 244 (1986), affd. 835 F.2d 67 (3d Cir.           
          1987); see Bagley v. Commissioner, 105 T.C. 396, 406 (1995).                
          Consideration of the nature of the claim is a factual inquiry.              
          Robinson v. Commissioner, 102 T.C. 116, 127 (1994), affd. in                
          part, revd. in part and remanded 70 F.3d 34 (5th Cir. 1995).                
               If the settlement agreement lacks express language stating             
          the purpose for which the settlement proceeds were paid, then the           
          most important factor in deciding whether the section 104(a)(2)             
          exclusion applies is the intent of the payor as to the purpose in           
          making the payment.  Stocks v. Commissioner, 98 T.C. 1, 10                  
          (1992), and cases cited therein.  If the payor's intent cannot be           
          clearly discerned from the settlement agreement, we examine all             
          of the facts and circumstances in the case.  Robinson v.                    
          Commissioner, supra at 127.                                                 
               In the instant case, respondent contends that petitioner's             
          failure to file a claim prior to signing the release precludes              
          petitioners' exclusion of the ITO payment from gross income                 

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