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which petitioner signed.
The release did not allocate the $40,000 recovery among the
four causes of action, nor did it allocate such recovery between
compensatory and punitive damages. However, in the release,
petitioner acknowledged that the payment represented settlement
of her claims for both compensatory and punitive damages.
Further, the release indicated that “a primary motivation and
consideration” on the part of Liberty Life in agreeing to settle
the case was to eliminate the claims made by petitioner for
punitive damages.
Pursuant to the terms of the retainer agreement with the
Olen law firm, petitioner received $23,550 from the settlement of
her lawsuit; i.e., $40,000, less attorney’s fees of $16,000 and
court costs and related legal expenses of $450.
Petitioner did not include in income on her 1995 income tax
return, Form 1040A, any portion of the $40,000 recovery received
from Liberty Life, nor did she deduct thereon any portion of the
attorney’s fees and court costs and related legal expenses that
were paid from such recovery.
In the notice of deficiency, respondent determined that
petitioner was not entitled to exclude from gross income under
section 104(a)(2) any portion of the $40,000 recovery received
from Liberty Life. Respondent also determined that petitioner
must include the entire recovery in income and then deduct the
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Last modified: May 25, 2011