Sudhir P. Srivastava and Elizabeth S. Pascual - Page 20

                                       - 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  Next

Last modified: May 25, 2011