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vacated and remanded without published opinion 84 F.3d 433 (5th
Cir. 1996), as authority for deducting the costs of litigating a
personal injury suit as a business expense. We disagree.
In McKay, the taxpayer was an employee who brought suit for
wrongful termination, breach of employment contract, RICO, and
punitive damages. The taxpayer was awarded damages for lost
compensation, "future" damages, and punitive damages for
wrongful, malicious, and oppressive acts by his employer. After
trial, the parties settled, and the settlement agreement provided
that sums were paid in extinguishment of the taxpayer's tort
claim for wrongful discharge and extinguishment of his breach of
contract claim. In the settlement agreement, the parties agreed
that the amount attributable to the wrongful discharge claim
represented compensatory damages excludable under section
104(a)(2), and the amount allocable to the breach of contract
claim was includable in income under section 61.15 Finding that
the allocations were the result of an arm's-length negotiation
between hostile adversaries, this Court accepted the express
allocations in the settlement agreement. Id. at 487.
15 The Court of Appeals for the Fifth Circuit vacated our
decision in this case. Citing Commissioner v. Schleier, 515 U.S.
323 (1995), the Court of Appeals held that the damages
attributable to the taxpayer's wrongful discharge claim were not
excludable under sec. 104(a)(2), because they were not received
on account of a personal injury. McKay v. Commissioner, 84 F.3d
433 (5th Cir. 1996), vacating and remanding without published
opinion 102 T.C. 465 (1994).
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