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against the Lynwood School District. The cause of action was
based solely on the Civil Rights Act of 1964, 42 U.S.C. secs.
2000a to 2000b-2. Petitioner alleged discrimination in placing
him on administrative leave and not reviewing his employment
agreement, and he sought damages for emotional distress, backpay,
punitive damages, attorney’s fees, and the cost of his suit.
During 1996, the parties to the above-referenced litigation
entered into a settlement agreement under which petitioner
received damages of $140,000 solely for emotional distress. Also
during 1996, petitioner paid legal fees and costs, in the total
amount of $55,127.03, for the legal representation concerning the
termination of his employment with the Lynwood District and the
Civil Rights Act litigation and its settlement. On their U.S.
Individual Income Tax Return (Form 1040) for 1996, petitioners
claimed, on Schedule A, Itemized Deductions, the $55,127.03 for
legal fees and costs, and respondent disallowed the claim. Of
the $55,127.03 in legal fees, $10,000 is attributable to the
attorney’s efforts before the school board and to protect
petitioner’s potential for future compensation as an employee.
OPINION
Respondent agrees that petitioner’s $140,000 settlement
recovery is exempt from tax under section 104(a)(2).2 The
2 All section references are to the Internal Revenue Code in
effect for the year in issue, and all Rule references are to the
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