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III. Application
A. Tort or Tort Type Rights
As indicated above, the first requirement for the section
104(a)(2) exclusion is that the claim underlying the funds
received must be based on tort or tort type rights. See
Commissioner v. Schleier, supra at 337. A tort is defined as a
“‘civil wrong, other than breach of contract, for which the court
will provide a remedy in the form of an action for damages.’”
United States v. Burke, 504 U.S. 229, 234 (1992) (quoting Keeton
et al., Prosser and Keeton on the Law of Torts 2 (1984)). Where
amounts are received pursuant to a settlement agreement, the
nature of the claim that was the actual basis for the settlement
controls excludability. See Fabry v. Commissioner, 111 T.C. 305,
308 (1998); Stocks v. Commissioner, 98 T.C. 1, 10 (1992); Metzger
v. Commissioner, 88 T.C. 834, 847 (1987), affd. without published
opinion 845 F.2d 1013 (3d Cir. 1988).
State law typically determines the nature of the legal
interests involved. See Massot v. Commissioner, T.C. Memo. 2000-
24. The claim must be bona fide, but it need not be sustainable
or valid. See Fabry v. Commissioner, supra at 308; Stocks v.
Commissioner, supra at 10; Metzger v. Commissioner, supra at 847.
The claim additionally need not have been asserted prior to the
settlement, but lack of knowledge of the claim on the part of the
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