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Although the settlement agreement recites petitioner’s
desired characterization of the entire settlement proceeds as
“payment for personal injury damages suffered after plaintiff’s
discharge on July 14, 1986”, we, unlike petitioner, do not accept
that statement as a binding characterization of the settlement
proceeds.
In Robinson v. Commissioner, 102 T.C. 116 (1994), the
taxpayers sued a State bank for failing to release a lien on
their property. After the jury returned a verdict in their favor
for approximately $60 million, including $6 million for lost
profits, $1.5 million for mental anguish, and $50 million in
punitive damages, the parties to that proceeding settled. In the
final judgment reflecting the settlement, which was drafted by
the parties and signed by the trial judge, 95 percent of the
settlement proceeds was allocated to mental anguish and 5 percent
was allocated to lost profits. We held that this allocation did
not control the taxability of the proceeds to the taxpayers. We
noted that the allocation was "uncontested, nonadversarial, and
entirely tax motivated", and that it did not accurately "reflect
the realities of * * * [the parties'] settlement." Id. at 129;
accord Hess v. Commissioner, T.C. Memo. 1998-240.
The same is true here. While the underlying litigation was
certainly adversarial, the parties were no longer adversaries
after they agreed on a settlement in principle. Petitioner
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