Madeline A. Coblenz and William J. Mason - Page 2

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          decision are (1) whether $266,6861 received by William J. Mason             
          (hereinafter, petitioner) in connection with a settlement of a              
          lawsuit should be excluded from gross income pursuant to section            
          104(a)(2); and (2) whether petitioners are liable for an                    
          accuracy-related penalty pursuant to section 6662(a).2                      
                                  FINDINGS OF FACT                                    
               Some of the facts have been stipulated and are so found.               
          The stipulation of facts and the attached exhibits are                      
          incorporated herein by this reference.  At the time they filed              
          their petition, petitioners resided in Houston, Texas.                      
               From 1977 to 1985, petitioner was a manager of various movie           
          theaters.  Towards the end of that period, petitioner met an                
          individual involved in radio broadcasting.  After this encounter,           
          petitioner became interested in purchasing and upgrading a radio            

               1  The record reflects that this amount comprises settlement           
          proceeds of $550,000 net of attorney’s fees and litigation                  
          expenses.  In the notice of deficiency, respondent’s                        
          determination did not include in income the entire $550,000, only           
          the $266,686.  At the end of the trial, pursuant to Rule 41(b),             
          respondent orally moved to amend the pleadings to conform to the            
          evidence (i.e., treating the settlement proceeds of $550,000 as             
          income and the attorney’s fees and litigation expenses as                   
          miscellaneous itemized deductions) and increase the deficiency.             
          We denied respondent’s motion.                                              
               2  All section references are to the Internal Revenue Code             
          in effect for the year in issue, and all Rule references are to             
          the Tax Court Rules of Practice and Procedure.                              

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