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$400,000 of the anticipated settlement proceeds to “back pay” and
“front pay”, and $100,000 to “pain and suffering”.
In the summer of 1995, Mrs. Peaco settled the lawsuit for
$584,000 and executed a Confidential Settlement Agreement and
General Release (settlement agreement) that states: “All funds
paid to Mildred Peaco in this settlement are for pain and
suffering claimed in this matter arising from physical injury to
her and not for front pay, back pay, or lost wages or benefits.”
At Mrs. Peaco’s insistence, CCIU agreed to this allocation.
Petitioners did not report the settlement proceeds on their
return.
OPINION
Petitioners contend that the express terms of the settlement
agreement reflect the intent of the parties, and, as a result,
all of the proceeds are excludable, pursuant to section
104(a)(2). Respondent contends that the entire proceeds should
have been included in petitioners’ gross income.
Section 104(a)(2) provides that gross income does not
include “the amount of any damages received (whether by suit or
agreement and whether as lump sums or as periodic payments) on
account of personal injuries or sickness.” Thus, an amount may
be excluded from gross income only when it was received both:
(1) Through prosecution or settlement of an action based upon
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Last modified: May 25, 2011