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acknowledged in the settlement statement that a portion of the
settlement proceeds had been characterized as personal injury
damages not subject to tax, but that this characterization was
not binding on taxing authorities, and agreed to pay any taxes
that might become due on the proceeds.
The settlement agreement provided that APV would be held
harmless for any taxes (other than on the amount allocated to
lost wages) “imposed on the amounts dispersed under this
agreement”.
On their 1993 income tax return, petitioners reported as
income only that portion of the settlement proceeds that was
allocated to wages--$32,476.61. They did not report or disclose
all or any part of the $197,024.76 that was allocated to personal
injury damages, nor did they claim or otherwise report a
deduction for all or any part of the attorney’s fees.
The notice of deficiency that was issued to petitioners made
an adjustment to their 1993 income to increase gross income in
respect of the settlement of petitioner’s ADEA claims by $197,024
(from $32,477 to $229,501). The notice also allowed $91,800 in
legal fees as an itemized deduction, reduced by $5,298 for the
2-percent floor on miscellaneous itemized deductions under
section 672 and by $4,694 for the overall limitation on itemized
2 Unless otherwise indicated, 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
(continued...)
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Last modified: May 25, 2011