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under section 104(a)(2). See United States v. Burke, 504 U.S.
229, 237 (1992); Thompson v. Commissioner, 89 T.C. 632 (1987),
affd. 866 F.2d 709 (4th Cir. 1989); Threlkeld v. Commissioner,
87 T.C. 1294 (1986), affd. 848 F.2d 81 (6th Cir. 1988). The
determination of the nature of a claim is factual. See Fabry
v. Commissioner, 111 T.C. 305 (1998). 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). We first look to the written terms of settlement
agreements to determine the origin and allocation of settlement
proceeds. See Metzger v. Commissioner, 88 T.C. 834 (1987),
affd. without published opinion 845 F.2d 1013 (3d Cir. 1988).
We may make that determination by reference to such agreement
when it is entered into in an adversarial context, at arm’s
length, and in good faith. See Knuckles v. Commissioner, 349
F.2d 610, 613 (10th Cir. 1965), affg. T.C. Memo. 1964-33.
To support their claim that the liquidated damages portion
of the settlement was paid on account of personal injuries
and/or sickness, petitioners direct our attention to the
wording of the release and to petitioners’ testimony about
their understanding of the settlement agreement. Petitioners
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