Thomas B. Hawkins and Leanna L. Hawkins, Deceased - Page 4

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          From the net amount, petitioners then subtracted $304,212 as the            
          “portion deemed non-taxable (50%)”.  The remaining $304,211 is              
          listed as the “Taxable portion of Merchant’s Bank Settlement”.              
               In a notice dated August 2, 2000, respondent proposed a                
          $304,212 increase to income on petitioners’ 1998 Federal income             
          tax return.  Petitioners did not agree with the proposed addition           
          to income.  On April 18, 2001, respondent issued a notice of                
          deficiency and determined a $700 increase in petitioners’ income            
          and a $285 deficiency.                                                      
               On May 8, 2001, respondent sent a letter to petitioners                
          advising them that the “proposed notice” was incorrect and                  
          stating “damages for emotional distress may not be treated as               
          damages on account of a personal physical injury.”  On August 29,           
          2001, respondent sent petitioners a “closing letter” that stated            
          respondent was able to “clear up the differences between your               
          records and your payors’ records.  * * *  You won’t need to file            
          a petition with the United States Tax Court to reconsider the tax           
          you owe.”                                                                   
               Respondent sent petitioners a letter dated October 25, 2001,           
          that stated their 1998 Federal income tax return was open for               
          examination and that “The primary purpose of the examination is             
          to review the lawsuit settlement paid to Leanna Hawkins in 1998.”           
          Respondent sent petitioners a letter dated January 2, 2002, that            
          stated “The law requires us to notify taxpayers in writing if we            






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