-10-
The term “damages received”, as used in section 104(a)(2),
denotes an amount received “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 the absence of bona fide
language in a settlement agreement as to the reason for a
settlement payment, we discern that reason by determining the
intent of the payor in making the payment. Robinson v.
Commissioner, 102 T.C. 116, 127 (1994), affd. in part and revd.
in part on another issue not relevant herein 70 F.3d 34 (5th Cir.
1995). We do so on the basis of all the facts and circumstances
of the case, including an analysis of the complaint filed and the
details surrounding the litigation. Id.
The $132,000 payment must meet a two-prong test in order for
it to be excluded under section 104(a)(2). First, the underlying
cause of action giving rise to Kidd’s recovery of the payment
must be based upon tort or tort type rights. Second, the payment
must be received on account of personal physical injuries or
physical sickness. Commissioner v. Schleier, supra at 328; see
also sec. 104(a)(2); sec. 1.104-1(c), Income Tax Regs. Unless
both of these prongs are met, the payment is not excludable from
petitioners’ gross income under section 104(a)(2). E.g., Prasil
v. Commissioner, T.C. Memo. 2003-100.
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