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settlement. Petitioners' concern was in receiving as much money
as possible. The banks, however, were very concerned about which
of petitioners' claims was the basis for the settlement agree-
ment; they wanted to avoid claims based on gross negligence or
willful misconduct, in order to protect their right to indemnity.
In Robinson v. Commissioner, 70 F.3d 34 (5th Cir. 1995),
affg. in part and revg. in part on another ground 102 T.C. 116
(1994), the taxpayers obtained a $60 million jury verdict against
a bank for wrongful failure to release a lien. The award
included $6 million for lost profits, $1.5 million for mental
anguish, and $50 million in punitive damages. While the trial
court was considering the bank's motion for a new trial, the
taxpayers settled their claims against the bank for $10 million.
In the final judgment reflecting the settlement, which was
drafted by the parties and signed by the trial judge, 95 percent
of the settlement proceeds were allocated to mental anguish and 5
percent were allocated to lost profits. The taxpayers excluded
the 95 percent under section 104(a)(2).
The Court of Appeals agreed with the Tax Court's finding
that the allocation was not entered into in a bona fide adversary
proceeding and that the judgment was simply "rubber stamped" by
the State court. The testimony of the attorneys who represented
the taxpayers in their suit against the bank supported this
Court's finding that the bank allowed the Robinsons to allocate
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