William T. and Kathryn A. Kees - Page 8

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          the settlement.  Further, the record contains no direct evidence            
          about UNUM’s intent in making the lump-sum payment to petitioner.           
          The record does contain the stipulation that “after protracted              
          oral negotiations, UNUM paid petitioner a lump-sum settlement of            
          $135,000 with respect to his disability claim.”  Under all the              
          facts and circumstances, we find that the nature of the claim               
          underlying the lump-sum payment was UNUM’s liability under the              
          disability plan.  Settlement does not transform the nature of the           
          payments into something other than “amounts received * * *                  
          through accident or health insurance” within the meaning of                 
          section 105(a).  Thus, section 105(a) applies to the lump-sum               
          payment of $135,000 as well as to the monthly payments totaling             
               The fact that section 105(a) applies does not necessarily              
          mean that the amounts are included in income.  As section 105(a)            
          itself indicates, there are exceptions.  The relevant exception             
          for the instant case appears in section 105(c), which provides as           
               Gross income does not include amounts referred to in                   
               subsection (a) to the extent such amounts--                            
                         (1) constitute payment for the permanent loss                
                    or loss of use of a member or function of the                     
                    body, or the permanent disfigurement, of the                      
                    taxpayer * * *, and                                               
                         (2) are computed with reference to the nature                
                    of the injury without regard to the period the                    
                    employee is absent from work.                                     

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