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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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