- 20 -
less than the amount awarded by the jury for only actual damages,
the entire settlement amount is excluded from their gross income
under section 104(a)(2). Respondent's determination is presumed
correct, and petitioners bear the burden of proving that
respondent's determinations are erroneous. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933).
We have often been asked to decide the proper allocation of
proceeds of a settlement agreement in the context of section
104(a)(2). It is well settled that express allocations in a
settlement agreement will be respected to the extent that the
settlement agreement is entered into by the parties at arm's
length and in good faith. Robinson v. Commissioner, 70 F.3d 34
(5th Cir. 1995), affg. in part, revg. in part and remanding 102
T.C. 116 (1994). If a lawsuit is settled, but no express
allocations are made in the settlement agreement, we must
consider the pleadings, the jury awards, or any court orders or
judgments. Robinson v. Commissioner, 102 T.C. at 127. In order
to characterize income as taxable under section 61 or excluded
from taxation under section 104(a)(2), we must ascertain "in lieu
of what were damages awarded" or paid. Bent v. Commissioner, 87
T.C. 236, 244 (1986), affd. 835 F.2d 67 (3d Cir. 1987).
In the instant case, the partial settlement agreement does
not specify how the $8,500,000 settlement amount is allocated
between actual and punitive damages, or between principal and
interest. Accordingly, we consider all the facts and
Page: Previous 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 NextLast modified: May 25, 2011