Hughes A. and Marilyn B. Bagley - Page 12

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            104(a)(2) as damages received on account of personal injuries or sickness.                  
            Respondent, in the notice of deficiency, reduced petitioner's income by the                 
            amount of $534,932, which she computed as the amount of legal fees deductible.              
            The amount was computed by showing legal fees allowable for deduction as                    
            $661,013.30, less legal fees claimed per return of $82,038, leaving                         
            $578,975.30 of deductible legal fees not claimed on the tax return, which,                  
            after the adjustment for 2 percent of adjusted gross income, left a deduction               
            of $534,932.30.  Respondent, in the notice of deficiency, stated that these                 
            legal fees were applicable to the taxable amount of the court-ordered award                 
            and the out-of-court settlement payment and were deductible as miscellaneous                
            deductions subject to reduction by an amount of 2 percent of adjusted gross                 
            income.                                                                                     
                                                OPINION                                                 
                  The first issue we have for decision is what portion, if any, of the                  
            $1.5 million paid to petitioner by IBP in connection with the settlement of                 
            all claims (other than the tortious interference with present employment                    
            claim, which had been disposed of by an entry of judgment by the District                   
            Court pursuant to the opinion of the Court of Appeals for the Eighth Circuit                
            prior to the time of settlement), was paid in lieu of punitive damages.                     
                  The parties are not in disagreement as to the law with respect to the                 
            allocation of an amount paid in a settlement, but have decided disagreements                
            as to how the law should be applied to the facts of this case.  Both parties                
            agree that where an amount is paid in settlement of a case, the critical                    
            question is, in lieu of what was the settlement amount paid.  McKay v.                      
            Commissioner, 102 T.C. 465, 482 (1994); Robinson v. Commissioner, 102 T.C.                  
            116, 126 (1994); Church v. Commissioner, 80 T.C. 1104, 1109 (1983).  The                    
            parties agree also that all of the facts surrounding the settlement must be                 
            considered in determining in lieu of what was the settlement amount paid.                   
            McKay v. Commissioner, supra.                                                               

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