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petitioners also claimed on page 1, line 30 of their 1994 return
an adjustment to, i.e., a reduction of, income of $96,773. The
amount of that adjustment equaled the aggregate amount of income
shown in the Form W-2 relating to the leased automobile and the
Forms 1099 relating to the settlement agreement that petitioners
reported in their 1994 return. Petitioners attached Form 8275,
Disclosure Statement, to their 1994 return with respect to the
adjustment to income of $96,773 that they claimed in that return.
That form stated:
WHILE SALVATORE D’AMICO WAS EMPLOYED BY PRO BAKERS
LIMITED HE SUFFERED A HEART ATTACK. AFTER HE HAD
RECOVERED AND RETURNED TO WORK, HIS EMPLOYMENT WAS
TERMINATED UNDER CIRCUMSTANCES GIVING RISE TO THE
INFERENCE THAT IT WAS BECAUSE OF HIS HEART ATTACK.
SALVATORE D’AMICO AND PRO BAKERS LIMITED ENTERED INTO A
SETTLEMENT AGREEMENT, A COPY IS ATTACHED HERETO. PRO
BAKERS LIMITED PAID HIM $96,773.29 OF THAT SETTLEMENT
IN 1994. THE IRS HAS DETERMINED THAT SUCH PAYMENT IS
NOT TAXABLE UNDER SECTION 104 (a)(2) OF THE CODE AND
REV RULE 93-88
In the notice of deficiency issued to petitioners (notice),
respondent determined to reduce by $34,157 the adjustment to
income of $96,773 that petitioners claimed in their 1994 return
“because it has not been established that any amount more than
$62,616 met the requirements of Section 104". As a result, in
the notice respondent increased petitioners’ taxable income for
1994 by $34,157.
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