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C. Discussion
The first requirement for exclusion under section 104(a)(2)
is that the claim underlying the settlement agreement must be
based on tort or tort-type rights. Commissioner v. Schleier,
supra. A tort is defined as a “‘civil wrong, other than breach
of contract, for which the court will provide a remedy in the
form of an action for damages.’” United States v. Burke, 504
U.S. 229, 234 (1992) (quoting Keeton et al., Prosser & Keeton on
the Law of Torts 2 (1984)).
In the absence of a general Federal common law of torts or
controlling definitions in the Internal Revenue Code, we look to
State law to determine the nature of the claim litigated. Erie
R.R. v. Tompkins, 304 U.S. 64, 78 (1938); United States v.
Mitchell, 403 U.S. 190, 197 (1971). The claim must be bona fide,
but it need not be sustainable or valid. See Stocks v.
Commissioner, 98 T.C. 1, 10 (1992).
In Illinois, “Tort law * * * applies in situations where
society recognizes a duty to exist wholly apart from any
contractual undertaking.” Collins v. Reynard, 607 N.E.2d 1185,
1186 (Ill. 1992). IIED has been recognized as a tort under
Illinois law. See Valentino v. Hilquist, 785 N.E.2d 891, 903
(Ill. 2003). This Court has also recognized the infliction of
emotional distress as a tortlike claim qualifying for exclusion
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