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The defendants were unable to pay the judgment and
separately filed voluntary petitions for bankruptcy under
Chapter 11 of the U.S. Bankruptcy Code. On July 12, 1989, the
parties, after considering the bankruptcies and the financial
condition of the defendants, entered into a settlement
agreement under which Carrera received a lump sum payment of
$331,250. Also, defendants issued a promissory note to Mr.
Anderson and Carrera in the amount of $325,000 to be paid over
5 years along with 10.75-percent interest. As part of the
settlement agreement Mr. Anderson and Carrera were to be paid
periodically over 60 months with a stipulation that Carrera
would receive payments until its proportionate share of the
damages, as determined by the original verdict, was satisfied
in full.
During the 1993 tax year petitioners received monthly
payments totaling $74,857. Petitioners did not include the
payments in their 1993 income tax; however, they submitted a
disclosure statement maintaining that the amount received was
on account of personal injuries and therefore excludable under
section 104(a)(2).
During the 1994 tax year petitioners received monthly
payments totaling $47,464. Petitioners did not include the
payments in their 1994 income tax; however, they submitted a
disclosure statement maintaining that the amount received was
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