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Respondent determined a deficiency of $25,276 in
petitioners’ Federal income tax for the 2001 taxable year. The
issue for decision is whether petitioners are entitled to exclude
$62,500 of settlement proceeds, including $25,000 of attorney’s
fees from their gross income for the 2001 taxable year.1
Background
Some of the facts have been stipulated, and they are so
found. The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time of their
petition, petitioners resided in California.
Petitioner Smita Valia (petitioner) was an employee of Smith
Barney, Inc. (Smith Barney) in its Southfield, Michigan, office
until her resignation in September 1993. In a letter dated
November 18, 1999, Stowell & Friedman, Ltd., a law firm in
Chicago, Illinois, informed petitioner that she was a member of a
class to whom Smith Barney would make a settlement offer in
Martens v. Smith Barney, Inc., 181 F.R.D. 243 (S.D.N.Y. 1998).
On February 5, 2001, petitioner entered into a “Release of
Claims” (release), which provided in relevant part:
1. Smita Valia (“Claimant”), in consideration of
a payment of $100,000.00 payable as follows: 1) the
payment of $37,500.00 to Claimant (less applicable
payroll withholding taxes); 2) the payment to Claimant
1 The parties stipulated that, if the attorney’s fees are
includable in income, then petitioners are entitled to deduct the
amount of such attorney’s fees as an itemized deduction for the
2001 taxable year.
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