- 15 -
(1995), affd. 121 F.3d 393 (8th Cir. 1997). For the taxable year
at issue, personal injuries include both physical and nonphysical
injuries. See Commissioner v. Schleier, supra at 329 n.4.5
If amounts are received pursuant to a settlement agreement,
the nature of the claim that was the actual basis for settlement
(and not the validity of the claim) governs whether such amounts
are excludable from gross income under section 104(a)(2). See
United States v. Burke, 504 U.S. 229, 237 (1992); Mayberry v.
United States, 151 F.3d 855, 858 (8th Cir. 1998); Seay v.
Commissioner, 58 T.C. 32, 37 (1972). “[T]he critical question
is, in lieu of what was the settlement amount paid”? Bagley v.
Commissioner, supra at 406. This determination is factual. Id.
II. Were the Underlying Causes of Action Based on Tort or Tort
Type Rights?
To satisfy the first Schleier requirement, the taxpayer must
prove the existence of a claim based upon tort or tort type
rights. See Commissioner v. Schleier, supra at 337. For this
purpose, claims must be bona fide but need not be valid or
sustainable. See Mayberry v. United States, supra at 859 n.3;
Taggi v. United States, 35 F.3d 93, 96 (2d Cir. 1994); Robinson
5 The Small Business Job Protection Act of 1996 (SBJPA),
Pub. L. 104-188, sec. 1605, 110 Stat. 1838, amended sec.
104(a)(2) by limiting the exclusion from gross income to, inter
alia, damages received “on account of personal physical injuries
or physical sickness.” This amendment, however, does not apply
to amounts received before Aug. 20, 1996. See SBJPA sec.
1605(d)(1), 110 Stat. 1839. Therefore, the SBJPA amendment is
inapplicable to the instant case.
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