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All section references are to the Internal Revenue Code in
effect for the taxable years in issue, and all Rule references
are to the Tax Court Rules of Practice and Procedure, unless
otherwise indicated. All dollar amounts are rounded to the
nearest dollar, unless otherwise indicated.
The issues for decision are: (1) Whether petitioners may
exclude from their gross income contingent fees of $3,455,500
paid to their attorneys from the settlement proceeds of
petitioner's personal injury suit. We hold they may not. (2)
Whether under section 104(a)(2) petitioners may exclude from
their gross income the entire amount of the settlement petitioner
received in 1991. We hold a portion of the amount petitioner
received in settlement is attributable to punitive damages and
interest and is taxable income to petitioners in the year it was
received. (3) Whether petitioners may deduct the attorney's fees
under section 162(a). We hold they may not deduct the attorney's
fees under section 162(a), but they may deduct the fees under
section 212(1), to the extent set out below. (4) Whether
petitioners are liable for an accuracy-related penalty pursuant
to section 6662 for 1991 and 1992. We hold they are to the
extent set out below.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulated facts and the accompanying exhibits are
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