- 21 -
reflect the realities of petitioner's underlying claims. As
discussed above, neither party had any interest in ensuring that
the allocation language accurately represented the risks of the
various claims.
The attorneys for both sides felt that petitioner's contract
and fraud claims were the strongest, and his tort claim of
outrageous conduct among the weakest. Blount especially feared a
runaway jury on punitive damages in the event that the case were
remanded to State court, since Alabama juries were "known" for
their large punitive damages awards. Despite the foregoing, the
settlement agreement allocated 80 percent of the lump-sum
proceeds to personal injury claims, only 20 percent to the
contract claim arising out of the April 27 letter, and nothing
whatsoever to the fraud claims and punitive damages claims.
Thus, in contrast to McKay v. Commissioner, supra, the settlement
agreement was not based on counsels' estimates of the probability
of success on the merits had the case gone to trial. See McShane
v. Commissioner, T.C. Memo. 1987-151. Moreover, we note that,
unlike McShane v. Commissioner, supra, the tax effects of the
allocation were considered by petitioner during the negotiations
on December 2, 1991.
Contrary to petitioners' request, we shall not blindly
accept the parties' allocation of settlement proceeds where, as
here, the allocation is patently inconsistent with the realities
of the underlying claims as determined by the attorneys for both
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