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Stocks v. Commissioner, 98 T.C. 1, 11 (1992). The claim must be
bona fide, but not necessarily valid. See Taggi v. United
States, 35 F.3d 93, 96 (2d Cir. 1994); Robinson v. Commissioner,
supra at 126; Stocks v. Commissioner, supra at 10. The crucial
question is “in lieu of what was the settlement amount paid?”
Bagley v. Commissioner, supra at 406.
In United States v. Burke, supra, the taxpayers brought a
sex discrimination claim under title VII against their employer.
The parties subsequently settled the case, and the employer
withheld Federal income taxes on the settlement received by the
taxpayers. The taxpayers sought refunds of the withheld taxes on
the ground that the settlement was excludable under section
104(a)(2) as “‘damages received * * * on account of personal
injuries or sickness.’” Id. at 232 (quoting section 104(a)(2)).
The Supreme Court held that the nature of the claim
underlying the taxpayers’ settlement determined the excludability
of the settlement under section 104(a)(2). See id. at 237. The
Court noted that title VII focused on “‘legal injuries of an
economic character’” and limited the available remedy to backpay
awards and injunctive relief. Id. at 238-239 (quoting Albemarle
Paper Co. v. Moody, 422 U.S. 405, 418 (1975)). The Court further
stated:
Nothing in this remedial scheme purports to recompense
a Title VII plaintiff for any of the other traditional
harms associated with personal injury, such as pain and
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