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paid him that amount, withholding nothing. He disclosed
receipt of those funds on his return but did not report that
amount as income.
The total amount due to Connelly by the State of Kansas
was $80,898. The State issued him a Form W-2 in the amount of
$40,449, withheld income and FICA taxes, and paid him the
balance of the $40,449, which he then reported as income on his
1994 Federal income tax return. The State also issued him a
Form 1099-MISC in the amount of $40,449 and paid him that
amount, withholding nothing. He disclosed receipt of those
funds on his return but did not report that amount as income.
Due to petitioners’ exclusion of the liquidated damages
settlement payments from income, the Commissioner issued
deficiency notices to each.
Jacobs and Connelly each claim that the liquidated damages
payments were excluded from income as compensation for personal
injuries and/or sicknesses and that they had each suffered
medical conditions while working for the Kansas Highway Patrol.
Jacobs began to have various physical problems in 1980,
including failing eyesight, elevated blood pressure, and sexual
dysfunction. He also experienced mental anguish and stress
because his job schedule and fatigue caused him to miss out on
many family activities. His physician put him on medication to
reduce his blood pressure, which decreased somewhat while he
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