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issue 70 F.3d 34 (5th Cir. 1995).
Section 1.104-1(c), Income Tax Regs., provides that "The
term 'damages received (whether by suit or agreement)' means an
amount received * * * through prosecution of a legal suit or
action based upon tort or tort type rights, or through a
settlement agreement entered into in lieu of such prosecution."
Thus, in order to exclude damages from gross income pursuant to
section 104(a)(2), the taxpayer must prove: (1) The underlying
cause of action is "based upon tort or tort type rights", and (2)
the damages were received "on account of personal injuries or
sickness". Commissioner v. Schleier, supra at 336-337.
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). See United States v.
Burke, 504 U.S. 229, 237 (1992). 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 Robinson v. Commissioner, 102 T.C. 116, 127 (1994),
affd. in part, revd. in part, and remanded 70 F.3d 34 (5th Cir.
1995).
Here, the complaint in the class action was exclusively for
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