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“damages received” as “an amount received (other than workmen’s
compensation) 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.” Amounts are
excludable from gross income only when (1) the underlying cause
of action giving rise to the recovery is based on tort or tort
type rights, and (2) the damages were received on account of
personal injuries or sickness. Commissioner v. Schleier, supra
at 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 under
section 104(a)(2). United States v. Burke, 504 U.S. 229, 237
(1992). Determination of the nature of the claim is a factual
inquiry and is generally made by reference to the settlement
agreement. Robinson v. Commissioner, 102 T.C. 116, 126 (1994),
affd. in part and revd. in part 70 F.3d 34 (5th Cir. 1995).
“[W]here an amount is paid in settlement of a case, 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). An important factor in determining the
validity of the agreement is the “intent of the payor” in making
the payment. Knuckles v. Commissioner, 349 F.2d 610, 613 (10th
Cir. 1965), affg. T.C. Memo. 1964-33. If the payor’s intent
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Last modified: May 25, 2011