Eldon R. Kenseth and Susan M. Kenseth - Page 11




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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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