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Taxpayer settled a lawsuit with his prior employer for
defamation on May 1, 1996, by entering into a
settlement agreement. In the settlement agreement, the
taxpayer released his former employer from any
liability related to his claims for defamation and, in
exchange, received $4 million. This $4 million was
comprised of the former employer’s promise to pay $1
million at the time the settlement agreement was
executed, $1 million in November 1996, $1 million in
May 1997 and $1 million in November 1997.
During the tax year 1997, the taxpayer received the
lawsuit settlement installment in May 1997. The former
employer failed to make payment in November 1997.
Under “Warren Jones v. Commissioner,” 524 F. 2nd 788
(9th Cir. 1975), rev’g 60 T.C. 663 (1973), and “Heller
Trust v. Commissioner,” 382 F.2nd 675 (9th Cir. 1967),
the taxpayer is required to treat his receipt of his
former employer’s promise to pay $4 million as an
amount realized in the 1996 taxable year at the time of
his receipt of the promise to pay, in May 1996. Under
IRC section 104, amounts received in May 1996 on
account of claims for defamation and other tort type
rights were excludable from gross income. (Reg. sec.
1.104-1(c)).
Accordingly, the taxpayer’s receipt of his former
employer’s promise to pay was excludable from gross
income.
Petitioner’s 1997 return also included a Form 8275, Disclosure
Statement. The disclosure statement cross-referenced the above
footnote.
On his 1998 return, petitioner reported his other income in
substantially the same manner as it was reported on his 1997
return--i.e., petitioner did not include the November 1998
payment in income and included a statement and a footnote similar
to those on his 1997 return. The footnote on the 1998 return
also noted that petitioner received the payment he was supposed
to receive in November 1997 in November 1998. Petitioner’s 1998
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