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The settlement agreement did not allocate the $5,000
settlement payment among monetary, emotional, and physical
damages.
D. 1999 Tax Return
During 1999, Mr. Henderson received $5,000 from Discover
Financial Services, Inc., in settlement of the lawsuit against
Morgan Stanley. On April 15, 2000, Mr. Henderson timely filed
his 1999 Federal income tax return. On his 1999 Federal tax
return, Mr. Henderson excluded from gross income the $5,000
settlement payment. Respondent issued a notice of deficiency to
Mr. Henderson regarding his 1999 tax year. In the notice of
deficiency, respondent determined, inter alia, that petitioner
failed to report taxable compensation of $5,000 for 1999.
OPINION
Petitioner does not dispute receiving the $5,000 settlement
payment in 1999 to settle petitioner’s claim against Morgan
Stanley. Petitioner contends, however, that the $5,000
settlement payment is not taxable because it comes under the
exclusion of section 104(a)(2). Respondent argues that the
$5,000 settlement payment is includable in petitioner’s gross
income for 1999. For the reasons stated below, we agree with
respondent.
Section 61(a) provides that “gross income means all income
from whatever source derived” except as otherwise provided. The
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