Wally O. and Kate A. Oyelola - Page 12

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          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).                                         





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