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Stated conversely, “If the settlement agreement lacks express
language stating that the payment was (or was not) made on
account of personal injury, then the most important fact in
determining how section 104(a)(2) is to be applied is ‘the intent
of the payor’ as to the purpose in making the payment.” Metzger
v. Commissioner, supra at 847-848 (quoting Knuckles v.
Commissioner, 349 F.2d 610, 613 (10th Cir. 1965), affg. T.C.
Memo. 1964-33).
Here, the settlement agreement explicitly designated the
disputed $30,000 amount as “compensation for emotional distress”.
Section 104(a) states unequivocally that “emotional distress
shall not be treated as a physical injury or physical sickness”,
except for amounts actually paid for medical care attributable to
the emotional distress. Essentially, then, our query is whether
the circumstances of this case afford any justification for a
departure from the result otherwise directed by the face of the
settlement document.
At the outset, we note that the record is nearly devoid of
information regarding the negotiations that led to the settlement
agreement. However, nothing suggests that the context was other
than adversarial and arm’s length. The settlement was reached
during the pendency of a filed legal action, and both sides were
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