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critical to that determination. See Knuckles v. Commissioner,
supra; Agar v. Commissioner, 290 F.2d 283, 284 (2d Cir. 1961),
affg. per curiam T.C. Memo. 1960-21. Although the belief of the
payee is relevant to that inquiry, the character of the settle-
ment payment hinges ultimately on the dominant reason of the
payor in making that payment. See Agar v. Commissioner, supra at
284; Fono v. Commissioner, 79 T.C. 680, 694 (1982), affd. without
published opinion 749 F.2d 37 (9th Cir. 1984).
The Supreme Court recently summarized the requirements of
section 104(a)(2) as follows:
In sum, the plain language of � 104(a)(2), the
text of the applicable regulation, and our decision in
Burke establish two independent requirements that a
taxpayer must meet before a recovery may be excluded
under � 104(a)(2). First, the taxpayer must demon-
strate that the underlying cause of action giving rise
to the recovery is “based upon tort or tort type
rights”; and second, the taxpayer must show that the
damages were received “on account of personal injuries
or sickness.” [Commissioner v. Schleier, supra at 336-
337.]
Each of the requirements that must be satisfied in order to
qualify the settlement amounts in dispute for exclusion from
income under section 104(a)(2) involves two inquiries that are
similar. The dual inquiries under the first requirement are
whether Mr. D’Amico’s underlying claim was based on tort or tort
type rights and, if it was, whether the underlying claim gave
rise to the payment by the Company of the settlement amounts in
dispute. The dual inquiries under the second requirement are
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