- 10 -
existed at the time of settlement; (3) the claim encompassed
personal injuries; and (4) the agreement was executed in lieu of
the prosecution of the tort claim and on account of the personal
injury, rendering it a settlement rather than a mere severance
agreement. See Greer v. United States, 207 F.3d 322 (6th Cir.
2000).
If a settlement is attributable to claims based on tort or
tort type rights as well as other rights, the taxpayer must
establish which portion of the settlement is attributable to
damages received based on tort or tort type rights. Similarly,
if the settlement may be attributable to damages received for
personal injuries or sickness as well as other harm, the taxpayer
must establish which portion of the settlement is attributable to
damages received for personal injuries or sickness. See
Whitehead v. Commissioner, T.C. Memo. 1980-508.
When damages are received pursuant to a settlement
agreement, the nature of the claim that was the actual basis for
settlement controls whether such damages are excludable under
section 104(a)(2). See United States v. Burke, supra; Thompson
v. Commissioner, 866 F.2d 709, 711 (4th Cir. 1989), affg. 89 T.C.
632 (1987); Robinson v. Commissioner, 102 T.C. 116, 126 (1994),
affd. in part, revd. in part on another issue 70 F.3d 34 (5th
Cir. 1995). Determination of the nature of the claim is factual.
See Bagley v. Commissioner, supra; Stocks v. Commissioner, 98
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