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the credibility of witnesses and probative value of evidence,
respondent’s position may be “substantially justified”. See
Creske v. Commissioner, T.C. Memo. 1990-318, affd. 946 F.2d 43
(7th Cir. 1991). In the case before us, the taxability of
petitioners’ settlement was dependent on the weight of the
evidence presented and our subsequent interpretation of the
settlement agreement.
Throughout the pretrial process and up to the March 24,
1998, trial, respondent possessed conflicting information about
the purpose of the settlement. Even though Allstate Insurance
Co.’s (Allstate) counsel, Charles Siegal, advised respondent’s
counsel on March 10, 1998, that Allstate did not pay punitive
damages, respondent possessed evidence supporting the position
that the payment was made in settlement of multiple claims,
including bad faith and/or punitive damages. That evidence
included the complaint against Allstate, the settlement
documents, and two letters from petitioners’ prior
representative. All referenced recovery for personal injury
and/or punitive damages.
Respondent also points out that the Allstate underwriter
involved in petitioners’ claim had advised that the settlement
was made for punitive or bad faith damages. It was only 4 days
before trial when the underwriter called respondent’s counsel to
advise that she could not testify to her prior statement because
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