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Of the $100,000 settlement proceeds, Smith Barney sent
Stowell & Friedman, Ltd. a check in the amount of $25,000, which
was characterized as payment of attorney’s fees and costs.
Smith Barney also sent, and petitioners received, $60,056.25 of
the remaining settlement proceeds.2 Consistent with the release,
Smith Barney issued petitioners a Form W-2, Wage and Tax
Statement, for $37,500 and a Form 1099-MISC, Miscellaneous
Income, for $62,500.
Petitioners reported $37,500 of the settlement proceeds on
their 2001 tax return, an amount corresponding with that reported
on the Form W-2. Petitioners did not report any of the remaining
$62,500 in settlement proceeds. Petitioners contend that they
are entitled to exclude the $62,500 reported on the Form 1099-
MISC from their gross income for the 2001 taxable year because
such amount was for sickness and injuries suffered by petitioner
from exposure to second-hand cigarette smoke at Smith Barney.
Discussion
Neither of the parties has addressed the applicability of
section 7491(a) regarding the burden of proof. Petitioners have
not established that they satisfied the requirements of section
7491(a); thus the burden of proof remains with petitioners.
2 Of the remaining $75,000 not sent to petitioners’
attorney, $37,500 was treated as wages subject to withholding
taxes for Michigan State income tax of $1,575, Federal income tax
$10,500, Social Security tax of $2,325, and Medicare tax of
$543.75.
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Last modified: May 25, 2011