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State law is of little help where there are several
claims, only some of which are for personal injuries.
The State law classification of the various claims will
be of no assistance identifying the claim or claims or
in carving up the damage recovery. In such cases we
must look to various factors, including the allegations
in the State court pleadings, the evidence adduced at
trial, a written settlement agreement, and the intent
of the payer.* * * [Threlkeld v. Commissioner, 87 T.C.
at 1306-1307.]
B. Bona Fide Dispute
Section 1.104-1(c), Income Tax Regs., defines damages for
purposes of the exclusion under section 104(a)(2) as amounts
which are received from prosecution of a legal suit, or “through
a settlement agreement entered into in lieu of such prosecution”.
In this context, “‘[a] settlement is an agreement to terminate or
forestall all or part of a lawsuit’”. Taggi v. United States,
supra at 96 (quoting Gorman v. Holte, 211 Cal. Rptr. 34, 37 (Ct.
App. 1985)); see also McCleary v. Armstrong World Indus., Inc.,
913 F.2d 257, 259 (5th Cir. 1990).
Settlement must involve a bona fide dispute over excludable
damages. Taggi v. United States, supra at 96. The requirement
of a bona fide dispute precludes ”a contrived ‘settlement’
designed to avoid taxation of the [settlement] proceeds.” Id.
The record shows that the first time Mr. Boyle or Ormet was aware
petitioner was asserting personal injury claims was following
receipt of the letter to Mr. Boyle’s counsel of July 27, 1995.
Petitioner’s assertion of the issue of personal injuries just
prior to the drafting of the Settlement Term Sheet is not
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