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We look to the nature of the claim that was the basis of the
settlement to determine whether the payments petitioner received
are excludable under section 104(a)(2). See id. at 237; Thompson
v. Commissioner, 89 T.C. 632, 644 (1987), affd. 866 F.2d 709 (4th
Cir. 1989). The critical 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). This
determination is factual. See Stocks v. Commissioner, 98 T.C. 1,
11 (1992).
When the settlement agreement expressly allocates the
settlement proceeds between tortlike personal injury damages and
other damages, the allocation is generally binding for tax
purposes to the extent that the agreement is entered into by the
parties in an adversarial context at arm’s length and in good
faith. See Bagley v. Commissioner, supra; Robinson v.
Commissioner, 102 T.C. 116, 127 (1994), affd. in part, revd. in
part, and remanded on other grounds 70 F.3d 34 (5th Cir. 1995);
Threlkeld v. Commissioner, 87 T.C. 1294, 1306-1307 (1986), affd.
848 F.2d 81 (6th Cir. 1988). Even an express allocation,
however, may be disregarded if the facts and circumstances
surrounding a payment indicate the payment was intended by the
parties to be for a different purpose. See Bagley v.
Commissioner, supra; Robinson v. Commissioner, supra;
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