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when (1) the underlying cause of action giving rise to the
recovery is based on tort or tortlike rights and (2) the
damages are received on account of personal injuries or
sickness. See, e.g., O’Gilvie v. United States, 519 U.S.
79 (1996); Commissioner v. Schleier, 515 U.S. 323, 336-337
(1995); sec. 1.104-1(c), Income Tax Regs.
The term “damages received”, as used in section
104(a)(2), is defined as an amount received “through
prosecution of a legal suit or action based upon tort
or tort type rights, or through a settlement agreement
entered into in lieu of such prosecution.” Sec.
1.104-1(c), Income Tax Regs. If the damages are received
pursuant to a settlement agreement, as in this case, the
nature of the claim that was the basis for the settlement
controls whether damages are excludable under section
104(a)(2). See United States v. Burke, 504 U.S. 229,
237(1992); Bagley v. Commissioner, 105 T.C. 396, 406
(1995), affd. 121 F.3d 393 (8th Cir. 1997).
The determination of the nature of a claim is a
question of fact and is generally made by reference to
the settlement agreement in light of the surrounding
circumstances. See, e.g., 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);
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