Edward P. Knoll and Mary K. King-Knoll - Page 16

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               suit or agreement and whether as lump sums or as                       
               periodic payments) on account of personal injuries or                  
               sickness;                                                              
               The regulations under section 104 provide that the term                
          “damages received (whether by suit or agreement)” means “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.”  Sec. 1.104-1(c), Income Tax Regs.               
               In Commissioner v. Schleier, supra, the U.S. Supreme Court             
          established a two-prong test for determining whether a taxpayer             
          is eligible to exclude income under section 104(a)(2).  The                 
          taxpayer must demonstrate (1) that the underlying cause of action           
          giving rise to recovery is based upon tort or tort-type rights              
          and (2) that the damages were received on account of personal               
          injuries or sickness.  See Commissioner v. Schleier, supra at               
          336-337.                                                                    
               B.  Contentions of the Parties                                         
               Petitioner contends that the $116,000 payment he received              
          from Winston was a result of arm’s-length negotiations resulting            
          in a settlement solely for his release of an IIED claim.                    
          Respondent contends that the $116,000 settlement payment was a              
          portion of a severance payment, and not consideration for a                 
          release of a specific IIED claim.                                           








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