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We agree with respondent that the allocation in the
settlement agreement does not control our decision herein, and
that none of the settlement proceeds are excludable from
petitioner's gross income under section 104(a)(2). Under
section 104(a)(2), settlement proceeds are excluded from gross
income to the extent that: (1) The cause of action underlying
the recovery of the proceeds is based upon tort or tort type
rights and (2) the proceeds are received on account of a personal
injury or sickness. Section 104(a)(2) is inapplicable when
either of these requirements is not met. Sec. 104(a)(2);
Commissioner v. Schleier, 515 U.S. 323, 336-337 (1995);
United States v. Burke, 504 U.S. 229, 233 (1992); sec. 1.104-
1(c), Income Tax Regs.
The nature of the claim underlying a damage award, rather
than the validity of the claim, determines whether damages fall
within this two-part test. United States v. Burke, supra at 237;
Robinson v. Commissioner, supra at 125-126. Ascertaining the
nature of the claim is a factual determination that is generally
made by reference to the settlement agreement, in light of the
facts and circumstances surrounding it. Key to this
determination is the "intent of the payor" in making the payment.
Knuckles v. Commissioner, 349 F.2d 610, 613 (10th Cir. 1965),
affg. T.C. Memo. 1964-33; Agar v. Commissioner, 290 F.2d 283, 284
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