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interference with contract, negligence, defamation,
promissory estoppel, invasion of privacy, or any other
theory, whether legal or equitable.
The settlement agreement did not allocate the $7,650 settlement
payment among Mrs. Prasil’s causes of action or between monetary
damages, emotional damages, and physical damages.
Pursuant to the settlement agreement, Mrs. Prasil received a
transmittal letter dated February 12, 1999, from Heartland’s
attorney enclosing a copy of the fully executed settlement
agreement and a settlement check from Heartland dated February
10, 1999, in the amount of $7,650. Petitioners deposited the
settlement check in their checking account. Subsequently,
Heartland issued a Form 1099-MISC, Miscellaneous Income (Form
1099), reporting “nonemployee compensation” of $7,650 paid to
Mrs. Prasil in 1999. At trial, petitioners testified that they
did not receive the Form 1099-MISC, but they acknowledged receipt
of the $7,650 settlement payment from Heartland in 1999.
Petitioners timely filed a joint Form 1040, U.S. Individual
Income Tax Return, for 1999 using the cash basis method of
accounting. In that return, petitioners excluded from gross
income the $7,650 settlement payment that Mrs. Prasil received
from Heartland.
On December 12, 2001, respondent issued a notice of
deficiency for 1999 to petitioners. In the notice of deficiency,
respondent determined, inter alia, that petitioners failed to
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