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regarding gender discrimination and not upon a claim of personal
physical injury or sickness. Consequently, petitioners cannot
avail themselves of section 104(a)(2) to exclude $37,500 of the
unreported settlement proceeds.
Petitioners nevertheless claim that the settlement proceeds
relate to injuries suffered by petitioner from exposure to
second-hand cigarette smoke at Smith Barney. Petitioners claim
that the release did not cover such injuries because Smith Barney
“wanted to protect [itself]”. Petitioners have not offered, nor
can they point to, any evidence in the record that supports such
characterization of the settlement payment.3
The remaining $25,000 not reported by petitioners is
characterized as attorney’s fees and costs. To the extent there
was previously any doubt as to the includability in income of
attorney’s fees received as part of a contingent-fee agreement,
the U.S. Supreme Court recently resolved the question. In
Commissioner v. Banks, 543 U.S. __, 125 S. Ct. 826 (2005), the
Supreme Court held that in general when a plaintiff’s recovery of
a money judgment or settlement constitutes income, the portion of
a money judgment or settlement paid to the plaintiff’s attorney
under a contingent-fee agreement is income to the plaintiff under
the Internal Revenue Code. Accordingly, the $25,000 attorney’s
3 It is somewhat illogical to suggest that the release
would not include all claims made by petitioner.
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Last modified: May 25, 2011