- 14 -
Commissioner, supra at 5; Cade v. Commissioner, T.C. Memo. 1999-394.
We address both requirements.
Tort or Tort Type Rights
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), and not the validity of the claim. See United
States v. Burke, supra at 237; Woodward v. Commissioner, 397 U.S.
572 (1970); 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). Determining the nature of the claim is a factual
inquiry. See Fabry v. Commissioner, supra; 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);
Burditt v. Commissioner, T.C. Memo. 1999-117. State law determines
the nature of the legal interests involved. See, e.g., Roemer v.
Commissioner, 716 F.2d 693, 697 (9th Cir. 1983), reversing on
another issue 79 T.C. 398 (1982). Federal law supplies the rule of
decision in determining whether a given payment is subject to
Federal income tax. See Helvering v. Stuart, 317 U.S. 154, 162
(1942).
In determining the purpose of the payment, we begin by looking
at the language in the settlement agreement. The language contained
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