- 9 -
F.3d 894, 901-902 (5th Cir. 1995); Bagley v. Commissioner, 105
T.C. 396, 416 (1995), on appeal (8th Cir., March 13, 1996).
Where damages are received pursuant to a settlement
agreement, the nature of the claim that was 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); 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, 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 (10 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 , 115 S. Ct. at 2166-2167. 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. In this
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