T.C. Memo. 1997-312
UNITED STATES TAX COURT
LANCE R. AND ELAINE C. LEFLEUR, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 720-96. Filed July 7, 1997.
H filed a lawsuit against his former employer
alleging breach of contract, fraud, and the tort of
outrageous conduct. Among other things, H received a
lump sum of $1 million to settle the suit, and he
incurred $173,542 in legal fees and costs in connection
therewith. The agreement expressly allocated $800,000
of the $1 million sum to compensatory damages for H's
tort claims on account of personal injuries, including
mental pain and suffering. The agreement allocated
$200,000 of that sum to one of H's contract claims.
None of the proceeds were allocated to punitive
damages. Ps included the $200,000 of the settlement
proceeds allocated to the contract claim in their gross
income on Schedule C attached to their Federal income
tax return for 1991. Ps relied on sec. 104(a)(2),
I.R.C., to exclude the remaining $800,000 allocated to
the personal injury claims from their gross income. Ps
also allocated the entire amount of attorney's fees and
costs to the contract claim, and deducted those fees
and costs as a Schedule C expense pursuant to sec. 162,
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