George and Kathleen Knevelbaard, et al. - Page 22

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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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