Robert Henderson - Page 4

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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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