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We must decide whether section 104(a)(2) allows petitioners
to exclude from their gross income certain proceeds received in
settlement of a lawsuit. We hold it does not. Unless otherwise
indicated, section references are to the Internal Revenue Code
applicable to 1993, and Rule references are to the Tax Court
Rules of Practice and Procedure. The term “petitioner” refers to
Steven P. Cade.
Background
All facts have been stipulated. The stipulation of facts
and the exhibits submitted therewith are incorporated herein by
this reference. Petitioners are husband and wife, and they
resided in Carlsbad, California, when we filed their petition.
They filed a joint 1993 Federal income tax return.
On August 17, 1990, petitioner agreed with CG Merger Corp.
(CG Merger) to sell to it for $850,000 all of the stock of Cade-
Grayson Co. (CGC). CGC Merger’s shareholders were John R. Heller
(Mr. Heller), Heller Seasonings & Ingredients, Inc. (Heller
Seasonings), and the James R. Heller Trust (Heller Trust)
(collectively, Heller Group). Petitioner and CGC also agreed on
that date that petitioner would serve as CGC’s president and
chief executive officer for five years in exchange for (1) an
annual salary, (2) incentive compensation, (3) supplemental
incentive compensation, (4) life, disability, and health
insurance, (5) perquisites and expense reimbursements, and (6)
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