Lance R. and Elaine C. LeFleur - Page 1

                                       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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