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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.
Discussion
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
expense.
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