Walter E. Hess and Helen L. Hess - Page 13

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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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