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,Page: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
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