Well-settled in the tax law is the notion that the character of amounts received in the settlement of a claim turns on the underlying nature of the claim. See Lyeth v. Hoey, 305 U.S. 188 (1930) and its progeny. The same holds true in characterizing amounts paid in settlements and is sometimes referred to as the “origin of the claim doctrine.” See, e.g., United States v. Gilmore, 372 U.S. 39 (1963), Woodland v. Commissioner, 397 U.S. 572 (1970), United States v. Hilton Hotels Corp., 397 U.S. 580 (1970).

The payment in Lyeth, made in settlement of an heir’s claim against his grandmother’s will, was held to be exempt from income tax as an inheritance for tax purposes. The payments in the Gilmore, Woodland and Hilton Hotel Corp. cases broadly concerned whether they were deductible for tax purposes by the payor as “ordinary and necessary…expenses” with the result in each case based upon an analysis of the underlying claims.

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