Mark Arth, for petitioners.
Jack Forsberg, for respondent.
SCOTT, Judge: Respondent determined a deficiency in petitioners' income
tax for the calendar year 1987 in the amount of $488,976.31. The issues for
decision are: (1) What portion, if any, of the amount of $1.5 million paid to
Hughes Bagley (petitioner) in settlement of a suit against Iowa Beef
Processors, Inc. (IBP), is allocable to punitive damages; (2) whether the
$500,000 in punitive damages paid to petitioner pursuant to a judgment against
IBP, and the portion, if any, of the $1.5 million paid to petitioner in
settlement of his suit against IBP which is allocable to punitive damages, are
excludable from petitioner's income under section 104(a)(2)1 as damages
received on account of personal injuries; (3) whether the portion of the legal
fees of $768,484.87 paid by petitioner during 1987 in connection with his suit
against IBP, which was a contingency fee based on a percentage of the
recovery, is properly to be offset against the recovery and, therefore, not
includable in income, or is a miscellaneous itemized deduction subject to the
adjustment for 2 percent of adjusted gross income under section 67(a); and (4)
whether the portion of the legal fees paid by petitioner in 1987, which was
computed on an hourly basis, is deductible by petitioner on Schedule C or is
an itemized deduction to the extent deductible; (5) whether the amount of
$48,575.34 of prejudgment and the amount of $282,772.41 of postjudgment
interest paid to petitioner, pursuant to a judgment against IBP, are
includable in petitioners' gross income.
FINDINGS OF FACT
Some of the facts have been stipulated and are found accordingly.
Petitioners, husband and wife, who resided in Sioux City, Iowa, at the
time of the filing of their petition in this case, filed their Federal income
1 All section references are to the Internal Revenue Code in effect for
the year in issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure, unless otherwise indicated.
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