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1995 Federal income tax. The issues for decision are:
(1) Whether proceeds received in settlement of an action under
the Fair Labor Standards Act of 1938, 29 U.S.C. secs. 201, 216(b)
(1994) (FLSA), are excludable from gross income as damages
received on account of personal injury or sickness within the
meaning of section 104(a)(2); and (2) whether petitioners may
exclude from gross income the portion of the settlement proceeds
retained by the attorneys representing the plaintiffs in the FLSA
action.
Background
The stipulation of facts and the accompanying exhibits are
incorporated herein by reference. Petitioners resided in
Vancouver, Washington, at the time the petition in this case was
filed.
In 1993, petitioner Brian David Nelson (petitioner), along
with 266 other employees of PayLess Drugstores, Inc. (PayLess),
filed a class action lawsuit under the FLSA in the United States
District Court for the District of Idaho. The class alleged
that, despite managerial-sounding titles and job descriptions,
they were in fact hourly employees who were required to work
overtime without compensation. As relief, the class requested to
be paid time-and-a-half for all hours worked in excess of the
statutory limit of 40 hours, liquidated damages in an amount
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