Section of Taxation Publications
  VOL. 58
NO. 1
FALL 2004
Contents | TTL Home

 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
The Problem of the Payor’s Intent in Tort-Based Settlements: Amos v. Commissioner
Stephen R. Klaffky


In Amos v. Commissioner, the Tax Court addressed the question of whether a global settlement agreement that releases the payor from tort liability, but also provides him with other benefits, is excludable from the recipient’s gross income under section 104(a) (2). In order to receive the settlement money at issue, the taxpayer not only waived all potential claims against the payor, but also agreed to maintain the confidentiality of all matters pertaining to the incident and to repay the entire settlement amount as liquidated damages should he breach that confidentiality. The court held that the intent of the payor was critical in determining whether the settlement was excludable by the recipient. Finding that the payor’s dominant reason in paying the settlement was to compensate for claimed physical injuries, the court concluded that 60% of the settlement income was excludable. But because the agreement expressly provided that a portion of the settlement money (unspecified in amount) was paid in consideration for the taxpayer’s silence on all matters pertaining to the incident, the court ruled that the remaining 40% was included in gross income. While the Tax Court’s attempt to allocate the settlement income between its taxable and nontaxable elements lacked any meaningful precedential guidance, the allocation nevertheless was an appropriate undertaking given the judicial construction of the section 104(a) (2) exclusion. Perhaps because the terrain is so unfamiliar, however, the court’s analysis reveals as many problems with the concept of judicial allocation of global settlements as it provides solutions.

This Note argues that, while judicial construction of the settlement exclusion requires courts to identify the compensatory and noncompensatory elements of global settlement agreements, the payor’s intent approach to identifying compensatory elements so disadvantages tort victims that it virtually destroys the exclusion. Ultimately, this note concludes that the arbitrary nature of the Amos decision is the result of this conflict in the law. Part I of this Note briefly reviews the stipulated facts essential to the court’s decision. Part II explains the Tax Court’s opinion. Part III analyzes the opinion by addressing three major issues: (1) should the court have attempted to allocate the settlement income at all; (2) was the standard applied for the allocation an appropriate one; and (3) did the court correctly apply that standard? Part IV contends that the Amos court waffled between two irreconcilable principles of law and ultimately embraced an arbitrary resolution.


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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