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Unreported Income From Settlements of Lawsuits
Marine Builders, Inc.
Petitioner argues that the $92,420 he received in 1994 in
settlement of his lawsuit against Marine Builders, Inc., was a
return of capital.18 The taxability of proceeds received from a
lawsuit depends on the nature of the claim and the basis of the
recovery. Raytheon Prod. Corp. v. Commissioner, 144 F.2d 110,
114 (1st Cir. 1944), affg. 1 T.C. 952 (1943). When amounts
received from a lawsuit, through litigation or settlement,
represent lost profits, the amount is taxable income; when the
amount represents damages for lost capital, such amount is not
taxable. Booker v. Commissioner, 27 T.C. 932, 937 (1957);
Raytheon Prod. Corp. v. Commissioner, 1 T.C. 952, 958 (1943),
affd. 144 F.2d 110 (1st Cir. 1944). Petitioner bears the burden
of establishing that the proceeds of a settlement are what he
claims them to be. Milenbach v. Commissioner, 318 F.3d 924 (9th
Cir. 2003), affg. on this issue 106 T.C. 184 (1996).
The complaint against Marine Builders, Inc., sought damages
for breach of warranty, lost income, and loss of value. The
settlement indicated that payments of $92,420 were for “damages
for contractual claims” but did not indicate what portion, if
any, of the payments was attributable to lost value versus lost
18 Petitioner concedes that the remaining $85,119 payment
received from Marine Builders, Inc., in 1995 is taxable income.
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