In the recent case Amos v. Commissioner of Internal Revenue, the United States Tax Court stated that "if a settlement agreement lacks express language stating what the amount paid pursuant to that agreement was to settle, the intent of the payor is critical to that determination." 2003 WL 2289795 (U.S. Tax Ct, 2003). As most personal injury attorney's understand, the correct "intent" is very important to memorialize in your settlement documents because IRC §104 (a) (2) provides that "gross income does not include the amount of any damages (other than punitive damages) received (weather by suit or agreement and whether as lump sum or as periodic payments) on account of personal physical injuries or physical sickness."
In Amos, the Court found that the dominant reason that the Defendant, Dennis Rodman, paid plaintiff the settlement amount at issue was to compensate petitioner for his alleged physical injuries arising from an incident involving the two individuals (Dennis Rodman allegedly lost his cool and had an altercation with Amos while Amos was photographing a Bulls Basketball game). However, the Court also found that the settlement was in consideration for several other requirements (mainly a confidentiality agreement). Since the settlement agreement identified those "other requirements" as consideration for the settlement proceeds, the Court determined that the parties did not intend all of the settlement proceeds to be allocated to the component for payment on account of personal physical injuries. As a result, the Court allocated 80% of the settlement as paid in consideration for the other requirements stipulated in the Settlement Agreement. The Court's allocation resulted in 20% of the settlement proceeds being (for non-physical injuries) included in Plaintiff's gross income and not exempt from IRC §61 (the general taxing statute).
For more, go here, and thanks to Matt Garretson.