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See sec. 1.104-1(c), Income Tax Regs. 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. See Commissioner v. Schleier, 515 U.S. 323,
336 (1995).
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). Where a settlement agreement lacks express language
stating what the settlement amount was paid to settle, the most
important factor is the intent of the payor. See Knuckles v.
Commissioner, 349 F.2d 610, 612-613 (10th Cir. 1965), affg. T.C.
Memo. 1964-33. Determining the nature of the claim is a factual
inquiry. 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).
Petitioner has failed to establish what part, if any, of the
settlement amount here was based upon tort or tort type rights
and was received on account of personal injuries. During his
employment with CWU, petitioner filed at least four other
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