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whether petitioners properly excluded the $500,000 payment from
gross income.
Petitioners bear the burden of proof. Rule 142(a).
B. General Rules
Section 61(a) provides that, except as otherwise provided,
“gross income” means “all income from whatever source derived”.
Sec. 61(a). With an exception not here relevant, section
104(a)(2) provides that “the amount of any damages received
(whether by suit or agreement * * * ) on account of personal
injuries or sickness” is excludable from gross income. The
regulations promulgated under section 104(a)(2) provide: “The
term ‘damages received (whether by suit or agreement)’ 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 such prosecution.” Sec. 1.104-1(c), Income Tax Regs. To
determine whether any payment received in settlement of a lawsuit
is excludable under section 104(a)(2), we consider the nature of
the claim that was the basis for the settlement, not the validity
of the claim. E.g., Metzger v. Commissioner, 88 T.C. 834, 847
(1987), affd. without published opinion 845 F.2d 1013 (1988).
“If the settlement agreement lacks express language stating that
the payment was (or was not) made on account of personal injury,
then the most important fact in determining how section 104(a)(2)
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