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At the time the returns were prepared, there were a few
court cases which supported an allocation of the proceeds
between personal injury damages (nontaxable) and contract-
type claims (taxable). Based on such decisions, the
taxpayer allocated 25% of the proceeds to contract-type
claims and allocated the remaining 75% of the proceeds as
nontaxable personal injury payments.
Recently, the courts have reversed earlier cases and have
ruled favorably for the taxpayers, as they have ruled that
100% of the payments in similar fact cases should be
excludible from taxable income. Specifically, the Downey v.
Commissioner, 97 T.C. 10 (1991) case recently overruled its
prior decision in Rickel v. Commissioner, 90-1 USTC Para
50,200 (3rd Cir. 1990).
Thus, petitioners claimed in the amended returns that all of the
payments received by petitioner were excludable from gross income
under section 104(a)(2). Consequently, they adjusted their
itemized deductions by claiming that the attorney's fees are not
deductible. The amended returns claimed refunds of $896 for
1988, $1,567 for 1989, and $1,574 for 1990.
In the notice of deficiency dated August 30, 1994,
respondent increased petitioners' gross income by $48,437 in
1988, $31,500 in 1989, and $31,500 in 1990, including in their
gross income all of the monthly payments petitioner received from
the credit union and all of the $50,000 lump-sum payment. The
notice allowed an additional itemized deduction of $41,250 in
1988 for attorney's fees.
The petition filed in this case on November 28, 1994, prior
to the Supreme Court's decision in Commissioner v. Schleier, 515
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