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employment with IBM is excludable from petitioners' 1993 gross
income pursuant to section 104(a)(2).
Pursuant to section 104(a)(2), gross income does not include
"the amount of any damages received (whether by suit or agreement
and whether as lump sums or as periodic payments) on account of
personal injuries or sickness." The regulations provide that "The
term 'damages received (whether by suit or agreement)' means an
amount received * * * 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. Thus, in order to exclude damages from
gross income pursuant to section 104(a)(2), the taxpayer must
prove: (1) The underlying cause of action is based upon tort or
tort type rights, and (2) the damages were received on account of
personal injuries or sickness. See Commissioner v. Schleier, 515
U.S. 323, 336-337 (1995). The claim must be bona fide. See Taggi
v. United States, 35 F.3d 93, 96 (2d Cir. 1994).
Where amounts are received pursuant to a settlement agreement,
the nature of the claim that was the actual basis for settlement
controls whether such amounts are excludable from gross income
under section 104(a)(2). See United States v. Burke, 504 U.S. 229,
237 (1992). 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). Determining the nature
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