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settlement agreement, petitioner, in 1993, received $33,000,
which was allocated by court order as follows:
Back wages $18,505
Interest 8,327
Liquidated damages 6,168
By letter dated February 10, 1994, the supervising attorney
for the EEOC informed petitioner that the United States Court of
Federal Claims had decided an unrelated case, Bennett v. United
States, 30 Fed. Cl. 396 (1994), revd. without published opinion
60 F.3d 843 (Fed. Cir. 1995), which held that “ADEA settlement
payments for backpay and liquidated damages are not taxable.” He
enclosed a copy of the opinion as well as a copy of an IRS ruling
regarding the taxability of money received in settlement of sex
and race discrimination claims. In the letter, the attorney
advised petitioner to consult with his tax adviser “regarding the
effect of the enclosed, if any, on your recent recovery in the
subject action.”
On their 1993 Federal income tax return, petitioners
reported the backpay award of $18,505 as wages on line 7 and the
interest award of $8,327 on line 8(a). Petitioners did not
report the liquidated damage award of $6,168. Petitioners
claimed an exclusion under section 104(a)(2) of $18,505 and
attached a schedule to the return explaining that the exclusion
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