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Settlement Payment and Petitioner’s Tax Return
Liberty issued two checks made payable to petitioner
pursuant to the settlement agreement. These two checks consisted
of a $12,000 employee compensation check, net of all applicable
withholding taxes,3 and a separate check in the amount of $58,000
(the $58,000 amount) as nonemployee compensation free of any
withholdings. Petitioner’s attorney deposited both checks into
his trust account and then issued petitioner a check for $43,930,
the amount of the settlement less the attorney’s fees and the
withheld payroll taxes.
Petitioner’s attorney advised her that the amount she
received from Liberty was to compensate her for her legal
expenses and for her personal injuries. Petitioner’s attorney
also advised her that the $58,000 amount was excludable from her
gross income.
Liberty issued petitioner a Form W-2, Wage and Tax
Statement, to report the $12,000 of back pay, and a Form 1099-
MISC, Miscellaneous Income, to report the $58,000 amount.
Petitioner reported the $12,000 as wage income on her 2000
Federal income tax return, but she did not report the $58,000
3The taxability of the $12,000 backpay is not in dispute.
Liberty withheld $6,070 for taxes from the backpay.
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Last modified: May 25, 2011