Lance R. and Elaine C. LeFleur - Page 9

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                              1.  * * * In exchange for the dismissal of *                            
                  * * [the] lawsuit, * * * Blount will pay to LeFleur the                             
                  sum of One Million Dollars ($1,000,000) * * *.  This                                
                  $1,000,000 sum will be payable within five days after                               
                  the dismissal of that lawsuit.  Blount agrees to pay                                
                  LeFleur such sum for the following claims asserted by                               
                  the plaintiff:                                                                      
                              A.  the sum of $0.00 for the amounts claimed                            
                  by LeFleur under the April 6, 1989 letter;                                          
                              B.  the sum of $200,000 for the commissions                             
                  due LeFleur under the April 27, 1989, letter plus any                               
                  future payments due LeFleur under said April 27, 1989,                              
                  letter * * *;                                                                       
                              C.  the sum of $800,000 for LeFleur's tort                              
                  claims on account of personal injuries and compensatory                             
                  damages, including mental pain and suffering;                                       
                              D.  the sum of $0.00 for punitive damages.                              
                  Petitioners filed their 1991 Form 1040, U.S. Individual                             
            Income Tax Return, on October 14, 1992.  Petitioners excluded                             
            from gross income $800,000 of the $1 million lump-sum settlement                          
            and reported on Form 8275, Disclosure Statement, attached to                              
            their return that this amount was exempt income under section                             
            104(a)(2).  Petitioners included in gross income the $200,000                             
            allocated to the contract claim on Schedule C attached to their                           
            return.  Petitioner's occupation was listed as "Commission                                
            salesman" on Schedule C.  On line 17 of Schedule C, petitioners                           
            deducted $173,542, the entire amount of litigation fees and costs                         
            incurred in bringing and settling the suit against the                                    
            defendants.                                                                               
                  On October 12, 1995, respondent issued a statutory notice of                        
            deficiency setting forth alternative positions.  As relevant                              




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