- 13 -
held that this allocation did not control the taxability of the
settlement proceeds, noting that the settlement was “uncontested,
nonadversarial, and entirely tax motivated.” Robinson v.
Commissioner, 102 T.C. at 129. We find this language equally
applicable to the present case.7
While the underlying litigation was adversarial, once
Whittier agreed to a settlement amount and negotiated the
inclusion of the indemnification and release of liability
clauses, the negotiation as to the characterization of the
settlement proceeds ceased to be adversarial. Petitioner wanted
a large portion of the recovery connected to a tortlike personal
injury so that she could avoid taxes under section 104(a)(2).8
Whittier, conversely, had no adversarial interest in the
classification of the settlement proceeds as it was indemnified
from any adverse tax consequences arising from the settlement.
7 We also find Robinson v. Commissioner, 102 T.C. 116
(1994), affd. in part and revd. in part on an issue not relevant
herein 70 F.3d 34 (5th Cir. 1995), inapt given the fact that it
was decided under sec. 104(a)(2) as it read before the 1996
amendment. Before amendment, that section arguably included
mental anguish as a personal injury. The section, as amended,
explicitly limits its application to “physical” injuries, thereby
excluding purely emotional distress.
8 We note that the total amount of the court judgment was
$584,350.76 (including court-awarded attorney’s fees and costs).
The matter was settled for $510,000. This $74,350.76 reduction
is almost exactly 30 percent of $240,000, approximating
petitioner’s expected tax benefit from the settlement as
structured.
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