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Indeck, having agreed in the written Settlement Agreement to
allocate the entire settlement payment to purchase price, had
doubts that the parties had agreed to a payment of $4,886,922 of
interest.
Overall, the extrinsic evidence persuades us that Indeck and
Mr. Polsky agreed to allocate the entire $19,866,922 settlement
payment to purchase price, notwithstanding any ambiguity
concerning interest that might exist within the four corners of
the Settlement Agreement. Accordingly, we reject Indeck’s claim
herein that $4,856,922 of the settlement payment was actually
intended as interest by the parties to the Settlement Agreement.
Although Indeck may have preferred an allocation of this amount
to interest, as the drafts of the agreement prepared by its
attorneys suggest, Mr. Polsky objected and prevailed. The
parties’ final, written agreement allocated the entire payment to
purchase price.
Where there is an express allocation in a settlement
agreement of a settlement payment, that allocation is generally
respected for tax purposes if the agreement was entered into by
the parties in an adversarial context at arm’s length and in good
faith. Bagley v. Commissioner, 105 T.C. 396 (1995), affd. 121
F.3d 393 (8th Cir. 1997); Robinson v. Commissioner, 102 T.C. 116
(1994), affd. in part and revd. in part 70 F.3d 34 (5th Cir.
1995). However, to be respected the allocation must reflect the
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