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petitioner and FBC under the breach of contract claims. One of
the awards of commissions plus interest was made only to
petitioner. The Judgment, entered on June 2, 1986, in the total
amount of $1,521,628.04 was based on breach of contract claims.
WNIC's insurance carrier appealed the Judgment to the Tenth
Circuit Court of Appeals (the Court of Appeals). Petitioner did
not appeal the Judgment. Prior to the filing of briefs in the
Court of Appeals, the parties entered into a settlement agreement
(the Settlement Agreement), effective September 23, 1987. In
accord with the Settlement Agreement, petitioner/FBC and WNIC
released all claims that the parties to the District Court Case
asserted against each other, including all contractual and "extra
contractual claims". The Settlement Agreement provided, inter
alia: (1) WNIC would make a lump sum payment in the amount of
$581,500 to FBC, and (2) WNIC would make guaranteed monthly
payments to petitioner in the amount of $3,000 for a period of
240 months ($36,000 per year for 20 years) commencing October 1,
1987. The Settlement Agreement specified that $1,510 of each of
the monthly payments would be paid towards satisfaction of the
Jury Award. The balance of $1,490 of the $3,000 was not
specifically allocated.
Petitioners filed joint Federal income tax returns for 1991,
1992, 1993, 1994, and 1995 (the Returns). On the Returns,
petitioners reported annuity income of $36,000 per year. Of this
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