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Where a settlement agreement does not address “what portion,
if any, of a settlement payment should be allocated towards
damages excludable under * * * [section 104(a)(2)], the courts
will not make that allocation for the parties.” Taggi v. United
States, supra at 746. If the “settlement agreement lacks express
language” regarding what the payment was for, “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, 88 T.C. 834, 847-848
(1987) (quoting Knuckles v. Commissioner, 349 F.2d 610, 613 (10th
Cir. 1965), affg. T.C. Memo. 1964-33), affd. without published
opinion 845 F.2d 1013 (3d Cir. 1988); see also Whitehead v.
Commissioner, T.C. Memo. 1980-508 (general release found to
indicate that payor “regarded the settlement payment as
compensation for all of the claims which may have been brought by
petitioner rather than as compensation for one particular type of
claim”).
The ultimate character of the proceeds depends on the
payor’s “dominant reason” for making the payment. Commissioner
v. Duberstein, 363 U.S. 278, 286 (1960); accord Agar v.
Commissioner, 290 F.2d 283, 284 (2d Cir. 1961), affg. per curiam
T.C. Memo. 1960-21. Here, the intent of the payor is evidenced
in the settlement agreement. Associates, by referring to the
amounts as income to be reported on Form 1099, and by making the
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