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subject to the settlement agreement and its effective date, a
“Recitals” section outlining relevant facts, and a
“Consideration” section providing the benefits and obligations of
each party. In the Consideration section, petitioner’s attorneys
included a statement that the settlement proceeds were in
satisfaction of petitioner’s claims for personal injuries,
“within the meaning of title 26, section 104, of the United
States Code”, resulting from the alleged tortious conduct by
First City Bank (the section 104 sentence).8
The FDIC attorney was surprised by the inclusion of the
section 104 sentence. After reading section 104, the FDIC
attorney concluded that only settlement proceeds on account of
physical injuries were excluded from gross income. Therefore, he
requested that the section 104 sentence be removed.
By September 12, 1995, the parties9 produced a final draft
of the settlement agreement (final settlement agreement). In the
final settlement agreement, the section 104 sentence was removed.
The Recitals section stated, among other things, that “Mason then
commenced an action * * *, alleging various tort claims based on
8 Around this period in September 1995, Mr. Cantrell
provided Mr. Simon an opinion that the settlement proceeds were
nontaxable.
9 Although FCLT, the purchasing corporation, and Madeline
Coblenz (petitioner’s wife) were not named parties in
petitioner’s lawsuit, the settlement agreement referred to them,
in addition to the FDIC and petitioner.
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