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After concessions,1 the issues to be decided are: (1)
Whether petitioners are entitled to exclude from gross income,
pursuant to section 104(a)(2), amounts received in settlement of
a class action suit, and (2) whether petitioners are entitled to
exclude from gross income amounts paid as legal fees.2
FINDINGS OF FACT
Some of the facts have been stipulated for trial pursuant to
Rule 91. The parties' stipulations of fact are incorporated
herein by reference and are found as facts in the instant case.
At the time they filed their petition in the instant case,
petitioners resided in Concord, California.
On June 1, 1979, a class action lawsuit, Kraszewski v. State
Farm Gen. Ins. Co., was filed against State Farm General
Insurance Co., State Farm Mutual Automobile Insurance Co., State
Farm Life Insurance Co., and State Farm Fire and Casualty Co.
1 In the notice of deficiency, respondent determined that, for
taxable year 1992, petitioners were liable for self-employment
tax in the amount of $985 and were entitled to a self-employment
tax deduction in the amount of $492. Subsequently, the parties
conceded that petitioners were not liable for the self-employment
tax and that petitioners were not entitled to the self-employment
tax deduction.
2 In the notice of deficiency, respondent allowed petitioners
a deduction in the amount of $41,395 for "Schedule C Legal Fees".
In an Amendment to Answer, however, respondent argues that
petitioners are not entitled to the deduction of $41,395 as a
trade or business expense on Schedule C, but, rather, as a
miscellaneous itemized deduction on Schedule A, subject to
statutory limitations. Respondent bears the burden as to "any
new matter, increases in deficiency, and affirmative defenses,
pleaded in the answer". Rule 142(a).
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