- 11 -
because a ruling on the physical injury question will be
sufficient to resolve the instant case, we shall follow the lead
of the parties and restrict our analysis to the second prong of
the test for exclusion under section 104(a)(2).
2. On Account of Personal Physical Injuries
As previously discussed, section 104(a)(2) sanctions
exclusion of payments received “on account of personal physical
injuries or physical sickness”. This phraseology reflects that
excludability depends not only on the nature of the injuries but
also on the purpose of the payment. Accordingly, in the context
of settlement payments, “the critical question is, in lieu of
what was the settlement amount paid.” Bagley v. Commissioner,
105 T.C. 396, 406 (1995), affd. 121 F.3d 393 (8th Cir. 1997).
This is a factual inquiry involving consideration of all facts
and circumstances surrounding the settlement. Id.
The Court has summarized the role in this calculus of
payment allocations set forth in a settlement agreement:
Where there is an express allocation contained in
the agreement between the parties, it will generally be
followed in determining the allocation if the agreement
is entered into by the parties in an adversarial
context at arm’s length and in good faith. However, an
express allocation set forth in the settlement is not
necessarily determinative if other facts indicate that
the payment was intended by the parties to be for a
different purpose. [Id.; citation omitted.]
4(...continued)
incident taking place in March of 1991 to support their request
for exclusion under sec. 104(a)(2).
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Next
Last modified: May 25, 2011