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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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