Walter E. Hess and Helen L. Hess - Page 11

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               On December 6, 1993, Balfour issued petitioner a check for             
          $425,000, and it issued his attorneys a check for $125,000.                 
          Balfour later issued petitioner a Form 1099-MISC, Miscellaneous             
          Income, reflecting the settlement payment, and it deducted the              
          settlement amount on its Federal income tax return as a                     
          commission expense.                                                         
               Petitioner's 1992 Form 1040 claimed a deduction for legal              
          fees of $95,274 from the Balfour litigation.  His 1993 Form 1040            
          did not report any of the settlement payment as income, claiming            
          that it was nontaxable.  The 1993 Form 1040 claimed a long-term             
          capital loss of $170,040 in connection with petitioner's                    
          termination of employment from Balfour.                                     
               Respondent determined that section 104(a)(2) did not apply             
          to exclude the $425,000 payment from petitioner's 1993 gross                
          income.  Respondent also determined that petitioner could not               
          deduct the claimed loss because:  (1) He had not established his            
          basis in the underlying asset and (2) he had not established that           
          his right to sell products in New York City became worthless                
          during 1992 or 1993.                                                        
          1.  Taxability of Settlement Proceeds                                       
               We must decide whether petitioner received any of the                  
          settlement proceeds on account of a personal injury.  To the                

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