Damian Gerard and Leigh H. Gerard - Page 15

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          (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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