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Whittier’s only interest in the settlement was resolving the
matter and avoiding any future tax consequences from doing so.
Once these concerns were met, Whittier ceased to be an active
participant in the negotiations and, in effect, gave petitioner a
green light to classify the settlement proceeds in whatever
manner she desired.
That petitioner did so is evident from the disparity between
her damages as argued at trial and the ultimate settlement. She
documented actual lost wages of $161,817 and argued that she was
entitled to up to $397,729 for total past and future lost wages
and benefits, as well as emotional distress, on account of
Whittier’s removal of her accommodation. The jury awarded her
$400,000. In the settlement, she allocated only $60,000 for past
and future lost wages. This large reduction in the amount
allocable to her lost wages (over $100,000 less than her
documented loss of past wages and $335,000 less than the total of
her lost past and future wages) was further tax advantaged to her
by splitting the receipt of it between 2 years. Such tax
planning, from which Whittier was insulated by the
indemnification clause, is not the product of arm’s-length
negotiations between adversarial parties. See, e.g., Robinson v.
Commissioner, supra at 127.
We are not persuaded by such agreements and look beyond the
stated form of the settlement to its economic realities. Id.
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