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Respondent contends that petitioners have satisfied neither
test. Respondent argues that "the Milk Producers' recovery arose
out of garden-variety breach of contract and economic-injury
torts stemming from the breach." Further, says respondent, the
proximate cause of the damages petitioners recovered was economic
injury from Knudsen's breach of its contractual duty to pay for
delivered milk.
Origin of the Claims: Tort or Tort Type Rights?
Respondent contends that "The primary focus of the Milk
Producers Complaint and the counts alleged therein was Knudsen's
contractual relationship with petitioners and the breach of that
relationship." We disagree.
The tax consequences of a settlement depend on the nature of
the litigation and on the origin of the claim but not on the
validity of that claim. Woodward v. Commissioner, 397 U.S. 572
(1970); United States v. Gilmore, 372 U.S. 39 (1963). Thus the
classification of a claim is extremely important.
In United States v. Burke, 504 U.S. 229 (1992), the Court
defined a tort as "'a civil wrong, other than a breach of
contract, for which the court will provide a remedy in the form
of an action for damages.'" Id. at 234 (quoting Keeton et al.,
Prosser and Keeton on the Law of Torts 2 (1984)). The primary
characteristic of "an action based upon tort type rights" is the
availability of compensatory remedies. Commissioner v. Schleier,
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