Robert Henry Lehmuth - Page 7

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               Section 61 provides that all income, from whatever source              
          derived, is includable in gross income unless specifically                  
          excluded by another provision.  Commissioner v. Glenshaw Glass              
          Co., 348 U.S. 426, 430 (1955).  Compensation for services is                
          specifically included in the definition of gross income.  Sec.              
          61(a)(1); see also Commissioner v. Smith, 324 U.S. 177, 181                 
          (1945) (“any economic or financial benefit conferred on the                 
          employee as compensation” is includable in taxable income,                  
          whatever the form or mode by which it is effected).  With respect           
          to damages, “‘whether a claim is resolved through litigation or             
          settlement, the nature of the underlying action determines the              
          tax consequences of the resolution of the claim.’”  Milenbach v.            
          Commissioner, 106 T.C. 184, 198 (1996) (quoting Tribune Publg.              
          Co. v. United States, 836 F.2d 1176, 1177 (9th Cir. 1988)).  In             
          characterizing the settlement payment for tax purposes, we ask:             
          “‘In lieu of what were the damages awarded?’” Id. (quoting                  
          Raytheon Prod. Corp. v. Commissioner, 144 F.2d 110, 113 (1st Cir.           
          1944), affg. 1 T.C. 952 (1943)).                                            
               The settlement here in question resolved petitioner’s                  
          lawsuit against Kits for its failure to pay petitioner overtime             
          compensation or wages.  The proceeds of the settlement were paid            

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