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Schleier, 515 U.S. 323, 336 (1995), established those
requirements as:
First, the taxpayer must demonstrate that the
underlying cause of action giving rise to the recovery
is “based upon tort or tort type rights”; and second,
the taxpayer must show that the damages were received
“on account of personal injuries or sickness.”
Under the 1996 amendment, the personal injury or sickness for
which the damages are received must be physical in nature.
In the present case, Mrs. Prasil received the $7,650
settlement payment pursuant to a settlement agreement with
Heartland. When damages 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, supra at 237. The
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), and cases cited
therein. If the settlement agreement lacks express language
stating what the settlement amount was paid to settle, we look to
the intent of the payor, Knuckles v. Commissioner, 349 F.2d 610,
613 (10th Cir. 1965), affg. T.C. Memo. 1964-33 (citing Agar v.
Commissioner, 290 F.2d 283, 284 (2d Cir. 1961), affg. per curiam
T.C. Memo. 1960-21), based on all the facts and circumstances of
the case, including the complaint filed and details surrounding
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