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due.2 Petitioner did not report on her 1998 income tax return
the $198,000 received for her attorney’s fees and costs, nor did
she report the $240,000 received under the settlement agreement
“for personal injuries and emotional distress”.
As part of this settlement, Whittier insisted that the
agreement contain a paragraph disclaiming any liability for its
actions and another paragraph requiring petitioner to indemnify
Whittier in the event her tax treatment of the settlement
proceeds was challenged by the Commissioner. Petitioner had a
contingent fee agreement with her attorney whereby she agreed to
pay a percentage of any recovery to him as compensation for his
services. In the event attorney’s fees were awarded by a court,
however, that award would constitute her attorney’s sole right to
recovery pursuant to the agreement.
On May 20, 2003, respondent issued a notice of deficiency to
petitioner determining that petitioner should have included as
ordinary income for 1998 her $438,000 of damages as it was not
excluded from gross income by section 104(a)(2).
OPINION
Petitioner bears the burden of proving by the introduction
of probative evidence that the amount set forth in the notice of
2 Petitioner’s 1997 taxable year is not before us, and we do
not consider it.
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