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Stephen R. Takeuchi, for respondent.
OPINION
HALPERN, Judge:
I. Introduction
By notice of deficiency dated February 14, 1996, respondent
determined a deficiency in petitioners' 1992 Federal income tax
of $201,054 and an accuracy-related penalty of $40,211.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
After concessions, the sole issue for decision is whether
$500,000 received by petitioners in settlement of a lawsuit
alleging injury to business reputation is excludable from
petitioners’ gross income under section 104(a)(2) as damages
received on account of personal injuries.1
1 On their 1992 Federal income tax return, petitioners
deducted legal fees incurred in connection with the recovery that
is the subject of this case. By amendment to answer, respondent
added a claim for a reduced deduction for legal fees if the Court
were to conclude that any portion of the recovery was excludable
from gross income. By the reply, petitioners denied the accuracy
of respondent’s method for determining the legal fees allocable
to that recovery. At the conclusion of the trial, the parties
stipulated that $100,000 is allocable to the recovery. Since we
determine that no portion of the recovery is excludable from
gross income, the issue raised by respondent’s amendment to
(continued...)
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