John W. Banks, III - Page 16




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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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