Ralph W. Emerson and Suzanne O. Emerson - Page 14

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          litigation and questionable prospects for recovery on his                   
          contract claims.                                                            
               In a similar situation, the taxpayers in Fono v.                       
          Commissioner, supra at 698-699, initiated litigation because of             
          their disappointment with a contract under which they expected to           
          receive over $1 million.  The taxpayers requested the allocation            
          in the settlement agreement to include personal injury to avoid             
          taxation on the amount.  The defendants in Fono adamantly refused           
          to make such an allocation and did not recognize any liability in           
          tort.  In recognizing the economic realities of the litigation,             
          this Court held that the entire amount was taxable.                         
               Personal injury was 1 of 10 causes of action referred to in            
          the settlement agreement and 1 of 17 causes of action in the                
          second amended complaint.  The mere mention of a physical injury            
          in a complaint does not, by itself, serve to exclude the recovery           
          of gross income under section 104(a)(2).  Petitioners argue that            
          the settlement was finalized based on the stipulation between the           
          parties to allow the second amended complaint to be filed, adding           
          a claim for personal injury.  This agreement is insufficient to             
          meet the requirements under section 104(a)(2).  The settlement              
          agreement and the second amended complaint together do not show             
          that the actual basis of settlement was on account of personal              
          injury.  In fact, petitioner’s counsel admitted in his cover                
          letter to the defendants’ counsel that the second amended                   

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