105 T.C. No. 27
UNITED STATES TAX COURT
HUGHES A. BAGLEY AND MARILYN B. BAGLEY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 531-93. Filed December 11, 1995.
In 1987, P received $150,000 in compensatory damages and
$500,000 in punitive damages pursuant to judgment on a claim for
tortious interference with future employment, with statutory
interest thereon, and $1.5 million in settlement of claims for
tortious interference with future employment, libel, and invasion
of privacy. P excluded all of these amounts from income under
sec. 104(a)(2), I.R.C. R determined that the punitive damages and
interest received from the judgment and $1.305 million of the
settlement amount attributable to punitive damages were not
excludable under sec. 104(a)(2), I.R.C., as damages received on
account of personal injuries or sickness. P paid attorney's fees
in connection with the litigation. Held: $500,000 of the
settlement proceeds is properly characterized as punitive damages.
Held, further, Commissioner v. Schleier, 515 U.S. ___, 115 S.Ct.
2159 (1995), has effectively overruled our decision in Horton v.
Commissioner, 100 T.C. 93 (1993), affd. 33 F.3d 625 (6th Cir.
1994), insofar as it held that punitive damages, even if
noncompensatory, are excludable from income under sec. 104(a)(2),
I.R.C., if the underlying claim is based on tort or tort type
rights, and to this extent we will no longer follow Horton v.
Commissioner, supra. Held, further, to the extent P's attorney's
fees are allocable to the taxable portion of P's awards, they are
deductible as a miscellaneous itemized deduction to which the
provisions of sec. 67(a), I.R.C., are applicable. Held, further,
the interest on the judgment award received by P is not excludable
from income, but attorney's fees applicable to this portion of the
award are deductible as miscellaneous itemized deductions.
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