- 11 -
income. Accordingly, on the basis of the record in the instant
case, we conclude that, pursuant to the settlement agreement, the
State Farm payment was intended to settle petitioner's claim
against State Farm under title VII.
As we have concluded that petitioner's claim was not based
upon tort or tort type rights, we need not address the second
requirement of Commissioner v. Schleier, supra, regarding the
nature of damages. Accordingly, we conclude that petitioners are
not entitled to exclude any part of the State Farm payment
pursuant to section 104(a)(2).9
The next issue to be decided is whether petitioners are
entitled to exclude from gross income amounts paid as legal
fees.10 Petitioners contend that, as petitioner's legal fees
were paid to counsel from the settlement proceeds and petitioner
never received such fees, petitioners are entitled to exclude the
legal fees from their income. Citing Alexander v. Commissioner,
72 F.3d 938 (1st Cir. 1995) (citing with approval McKay v.
Commissioner, 102 T.C. 465 (1994), revd. on another issue without
published opinion 84 F.3d 433 (5th Cir. 1996)), affg. T.C. Memo.
9 We note that our opinion herein is consistent with prior
decisions of this Court, which similarly held that settlement
proceeds received pursuant to the Kraszewski litigation were not
excludable from gross income under sec. 104(a)(2). See Raney v.
Commissioner, T.C. Memo. 1997-200; Clark v. Commissioner, T.C.
Memo. 1997-156; Martinez v. Commissioner, T.C. Memo. 1997-126;
Fredrickson v. Commissioner, T.C. Memo. 1997-125.
10 Respondent bears the burden as to this issue.
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