6
by agreement * * * ) on account of personal injuries or
sickness". Section 1.104-1(c), Income Tax Regs., provides that
the term "damages received" "means an amount received (other than
workmen's compensation) through prosecution of a legal suit or
action based upon tort or tort type rights, or through a
settlement agreement entered into in lieu of prosecution."
Petitioner's settlement proceeds may be excluded from gross
income only if petitioners show that: (1) the underlying cause
of action giving rise to the recovery is based upon tort or tort
type rights and (2) the damages were received on account of
personal injuries or sickness. Commissioner v. Schleier, supra
at 337.
Whether damages received pursuant to a settlement agreement
are excludable under section 104(a)(2) depends on the nature of
the underlying claim, not the validity of such claim. United
States v. Burke, 504 U.S. 229, 237 (1992). Determination of the
nature of the claim is factual. Bagley v. Commissioner, 105 T.C.
396 (1995), affd. 121 F.3d 393 (8th Cir. 1997). Where the
settlement agreement lacks express language stating what the
payment was made on account of, the most important element is the
intent of the payor. Knuckles v. Commissioner, 349 F.2d 610
(10th Cir. 1965), affg. T.C. Memo. 1964-33; Robinson v.
Commissioner, 102 T.C. 116, 126 (1994), affd. in part and revd.
in part 70 F.3d 34 (5th Cir. 1995).
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