- 19 -
as petitioner's attorneys could not be parties in the cause of
action and did not otherwise have rights in the cause of action
equal to those of petitioner, in the terms of Lucas v. Earl,
supra, the attorneys did not own any portion of the tree from
which the settlement proceeds were derived.
Accordingly, we find that petitioners realized benefit from
the entire amount of the settlement proceeds, and they may not
exclude from their gross income the portion of the settlement
proceeds paid to Branton & Hall and Spears.
Issue 2. Whether Under Section 104(a)(2) Petitioners May Exclude
the Entire Settlement Amount From Their Gross Income
Respondent and petitioners agree that the amount received by
petitioner for actual damages is excludable from petitioners'
income under section 104(a)(2).
Respondent determined that the $8,500,000 settlement amount
should be allocated proportionally to the judgment of $11,500,000
in actual damages, $17,500,000 in punitive damages, and
prejudgment interest of $2,597,201.9
Petitioners assert that as $8,500,000 is exactly the amount
that petitioner initially pled as actual damages, and as it is
9 We note that this method of allocation was approved in
Robinson v. Commissioner, 70 F.3d 34, 38 (5th Cir. 1995), affg.
in part, revg. in part and remanding 102 T.C. 116 (1994); see
also Rozpad v. Commissioner, T.C. Memo. 1997-528 (the judgment,
albeit not final, nonetheless furnishes an adequate guideline for
allocation by the Commissioner to the extent that it is composed
of both compensatory damages and prejudgment interest), affd. __
F.3d __ (1st Cir. Aug. 25, 1998).
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