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Respondent contends that petitioners may not exclude the
Xircom payments from income under section 104(a)(2) because
Xircom paid those amounts to replace wages petitioner would have
earned if Xircom had not withdrawn its job offer. We agree with
respondent for reasons discussed next.5
Gross income does not include the amount of any damages
received (whether by suit or agreement and whether as lump sums
or as periodic payments) on account of personal injuries or
sickness. Sec. 104(a)(2). We decide the tax treatment of the
Xircom payments by considering in lieu of what these amounts were
paid. Bagley v. Commissioner, 105 T.C. 396, 406 (1995), affd.
121 F.3d 393 (8th Cir. 1997).
The April 18, 1994, agreement between petitioner and Xircom
does not state that the payments were on account of personal
injury or sickness. Where a settlement agreement is silent as to
whether a payment was made on account of a personal injury, the
most important factor in determining the application of section
104(a)(2) is the intent of the payor. Knuckles v. Commissioner,
349 F.2d 610, 613 (10th Cir. 1965), affg. T.C. Memo. 1964-33;
Agar v. Commissioner, 290 F.2d 283, 284 (2d Cir. 1961), affg. per
5 Sec. 7491 applies to court proceedings arising in
connection with examinations commencing after July 22, 1998.
Petitioners do not contend that respondent bears the burden of
proving that sec. 104(a)(2) does not apply, and they introduced
no evidence establishing that the examination in this case
commenced after July 22, 1998. Accordingly, petitioners bear the
burden of proving that sec. 104(a)(2) applies. Rule 142(a)(1).
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