George W. Guill - Page 5

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               Respondent issued petitioner a notice of deficiency that                
          reflects respondent's determination that the $250,000 in punitive            
          damages is includable in petitioner's 1992 gross income as "Other            
          Income" and that he must deduct the legal costs on Schedule A,               
          Itemized Deductions, as a miscellaneous deduction.  Respondent's             
          determination as to the punitive damages and the legal costs                 
          resulted in certain other "mechanical" adjustments, one of which             
          was the applicability of the alternative minimum tax.                        
               In a case of first impression, we must decide whether the               
          litigation costs attributable to an independent contractor's                 
          recovery of punitive damages are deductible on Schedule C as a               
          business expense or on Schedule A as a nonbusiness itemized                  
          deduction.1  Petitioner also contests respondent's determination             
          that petitioner did not receive the punitive damages on account              
          of a personal injury.  We recently held that the punitive damages            
          received by Mr. Whitley, petitioner's coplaintiff in the Academy             
          lawsuit, were includable in Mr. Whitley's gross income.  See                 
          Whitley v. Commissioner, T.C. Memo. 1999-124.  We relied mainly              
          on O'Gilvie v. United States, 519 U.S. 79 (1996), Commissioner v.            
          Schleier, 515 U.S. 323 (1995), and United States v. Burke,                   
          504 U.S. 229 (1992), concluding that punitive damages received               
          under South Carolina law are not excludable from gross income                

          1 Respondent concedes that the litigation costs attributable                 
          to the actual damages are deductible on Schedule C as a business             

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