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The release indicates that the unreported settlement
proceeds of $62,500 consisted of two components: (1) $37,500
“for which an IRS ‘Form 1099’ will be issued” and (2) $25,000 for
attorney’s fees and costs. Language in a settlement agreement
can offer some probative evidence on how a settlement payment
should properly be characterized for purposes of section
104(a)(2). See, e.g., Bent v. Commissioner, 87 T.C. 236, 246
(1986), affd. 835 F.2d 67 (3d Cir. 1987). That characterization
is important in deciding whether the payment may be excluded from
a taxpayer’s gross income.
In general, a taxpayer’s gross income broadly encompasses
all income from whatever source derived. Sec. 61(a). It does
not include “the amount of any damages (other than punitive
damages) received (whether by suit or agreement and whether as
lump sums or as periodic payments) on account of personal
physical injuries or physical sickness”. Sec. 104(a)(2). As
such, settlement proceeds on account of nonphysical injuries,
such as gender discrimination, may not be excluded under section
104(a)(2).
The underlying litigation upon which the parties rely was
reported as Martens v. Smith Barney, Inc., supra. The complaint
in that case raised allegations of gender discrimination. See
id. at 250. There was no claim of personal physical injury or
sickness. Similarly, the release focuses on claims and demands
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Last modified: May 25, 2011