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medical care attributable to such emotional distress. Sec.
104(a).
Where damages are received pursuant to a settlement
agreement, the nature of the claim that was the actual basis for
the agreement controls whether such damages are excludable under
section 104(a)(2). Stocks v. Commissioner, 98 T.C. 1, 10 (1992);
Metzger v. Commissioner, 88 T.C. 834, 847 (1987), affd. without
published opinion 845 F.2d 1013 (3d Cir. 1988). Where the
settlement agreement lacks express language stating what the
settlement amount was paid to settle, then the most important
factor in making that determination is the intent of the payor in
making the payment. Stocks v. Commissioner, supra; Metzger v.
Commissioner, supra.
Petitioner argues that the settlement proceeds represent
compensation for a physical injury and therefore are excludable
from income under section 104(a)(2). Alternatively, if the Court
should find that the proceeds are not excludable under section
104(a)(2), petitioner argues that the portion of the proceeds
paid directly to her attorney should not be included in
petitioner’s income.
With respect to petitioner’s first argument, we find that
the settlement proceeds do not represent compensation for a
physical injury. Petitioner argues that the eventual settlement
was made for claims which were not made originally in the
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