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petitioner’s objections. On August 13, 1998, the Bankruptcy
Court ruled from the bench that (1) respondent’s claims as to
1988 through 1991 were not dischargeable under section
523(a)(1)(C) of the Bankruptcy Code, and (2) respondent’s claim
as to 1994 was allowed. In the course of this bench ruling, the
Bankruptcy Court made the following observations:
Turning to the second problem, the objection to the
claim for 1994 tax liabilities, which proof of claim
has been filed by the Internal Revenue Service.
The claim, of course, enjoys a prima facia
validity under 502 [of the Bankruptcy Code], the debtor
[petitioner] then came forward and introduced evidence
which if concluded by the trier of fact to be a
scenario which was proven, would in fact defeat the
claim. The debtor’s theory is, of course, that these
monies were received not as income which is taxable but
as damages under settlement agreement of what the
debtor asserts is a cause of action that would be
included under 26 U.S.C. 104(a)(2).
The burden then of establishing the entitlement
falls back to the claim holder. The facts are that the
debtor had a stroke which for some period of time
disabled the debtor and that while he was recuperating,
his employer decided to terminate his employment, that
there was a negotiated separation agreement which is in
evidence as Government Exhibit 21, a part of which was
a release and waiver of claims in evidence as Debtor’s
Exhibit 1 and pursuant to which, the debtor was paid
certain funds.
The IRS would categorize these funds as, in
effect, severance pay which is a taxable income. The
debtor would categorize these funds as damages received
by agreement on account of personal physical injuries
or physical sickness, excludable from taxable income
under 26 U.S.C. 104(a)(2).
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