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Sec. 1.104-1(c), Income Tax Regs. In the context of a settlement
agreement, the nature of the claim that was the basis for a
settlement controls as to the question of whether damages are
excludable under section 104(a)(2). United States v. Burke, 504
U.S. 229, 237 (1992).
The determination of the nature of a claim is a question of
fact. Robinson v. Commissioner, 102 T.C. 116, 126 (1994), affd.
in part, revd. in part, and remanded on another issue 70 F.3d 34
(5th Cir. 1995). When a settlement agreement explicitly
allocates settlement proceeds between damages for tort type
personal injuries and other types of damages, that allocation may
be respected if a Court finds that it was the product of arm’s-
length, adversarial, and good faith negotiations. Id. at 127.
However, where a taxpayer settles contract claims and tort
claims for a lump-sum amount and neither the agreement nor other
evidence provides a basis to allocate any portion to tort claims
for personal injuries, the courts have decided that they are not
in a position to be able to make allocations on the parties’
behalf. See Taggi v. United States, 35 F.3d 93, 96 (2d Cir.
1994); Reisman v. Commissioner, T.C. Memo. 2000-173, affd. 3 Fed.
Appx. 374 (6th Cir. 2001). Under those circumstances, the
settlement proceeds have been held to be includable in a
recipient’s income. See, e.g., Morabito v. Commissioner, T.C.
Memo. 1997-315.
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