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Following the examination, petitioners hired a tax lawyer to
represent them and to proceed to Appeals for further
consideration of the examining agent’s findings. The lawyer
engaged by petitioners was qualified in litigation and tax
issues, and he assigned a law clerk to represent petitioners’
interests before Appeals.
The law clerk and the Appeals officer focused upon the
examining agent’s findings; i.e., the question of whether the
settlement was for punitive damages. The law clerk argued that
no portion of the $130,000 settlement was attributable to
punitive damages. As support for this argument, the law clerk
attempted to show that the total amount received from the
insurance company was needed to repair petitioners’ residence.
The documents shown to the Appeals officer included receipts for
repair to petitioners’ residence and the insurance settlement
documents. During consideration by Appeals, petitioners conceded
that they were not entitled to exclude any portion of the
settlement recovery under section 104.
The Appeals officer concluded that petitioners had not shown
that the $130,000 recovery was not attributable to taxable
punitive damages. The Appeals officer’s conclusion was based on
the examiner’s report, the underlying documents indicating that
petitioners were seeking punitive damages, and the insurance
settlement document referencing punitive damages. The Appeals
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Last modified: May 25, 2011