Hughes A. and Marilyn B. Bagley - Page 1

                                            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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