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The agreement then set forth a general release of all claims of
any kind by Murray against the May Company.
In 1999, petitioner received $26,547 of the $50,000 in
settlement proceeds. Petitioner’s attorney retained the
remainder of the proceeds consisting of “costs advanced” of
$4,620, a 40-percent contingency fee of $18,152, and a
1.5-percent payment of $681 for costs.
Petitioner filed an individual Federal income tax return for
taxable year 1999 on a Form 1040, U.S. Individual Income Tax
Return. Petitioner paid a tax return preparer to prepare her
return, and she sought advice--both from this preparer and from
the attorney who had represented her in the suit against the May
Company--concerning the proper tax treatment of the settlement
proceeds. In the space provided adjacent to line 21 of the Form
1040, “Other income”, petitioner made the following notation:
THE MAY DEPT STORE 50,000.
PHYS. INJURY SETTLEMENT <50,000.>
Petitioner did not include any portion of the $50,000 settlement
in her income, nor did she claim any deduction for the legal
expenses she incurred with respect thereto.
In the notice of deficiency, respondent determined that
petitioner was required to include in gross income the full
amount of the $50,000 settlement. Respondent also determined
that petitioner is liable for the accuracy-related penalty under
section 6662(a) for a substantial understatement of tax.
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