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The regulations under section 104(a)(2) restate the statutory
language of that section and further provide:
The term “damages received (whether by suit or agree-
ment)” 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.]
Where damages are received pursuant to a settlement agree-
ment, such as is the case here, the nature of the claim that was
the actual basis for settlement controls whether such damages are
to be excluded from income under section 104(a)(2). See United
States v. Burke, supra at 237. The crucial question is “in lieu
of what was the settlement amount paid?” Bagley v. Commissioner,
105 T.C. 396, 406 (1995), affd. 121 F.3d 393 (8th Cir. 1997).
The determination of the nature of the claim is factual. See
Robinson v. Commissioner, 102 T.C. 116, 127 (1994), affd. in
part, revd. in part, and remanded on another issue 70 F.3d 34
(5th Cir. 1995); Seay v. Commissioner, 58 T.C. 32, 37 (1972).
Where there is a settlement agreement that is entered into in an
adversarial context, at arm’s length, and in good faith, that
determination is usually made by reference to such agreement.
See Knuckles v. Commissioner, 349 F.2d 610, 613 (10th Cir. 1965),
affg. T.C. Memo. 1964-33; Robinson v. Commissioner, supra. If
the settlement agreement lacks express language stating what the
settlement amount was paid to settle, the intent of the payor is
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