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Here, the non-arm’s-length pretense reflected in the settlement
agreement does not reflect the reality of the underlying lawsuit,
which was submitted to the jury as a discrimination action rather
than as one arising from “personal physical injuries” to
petitioner. We hold that none of the proceeds received under the
settlement agreement fall within the reach of section 104(a)(2).9
II. Portion of Settlement Proceeds Paid to Petitioner’s Attorney
We decide whether sums paid to petitioner’s attorney in lieu
of a contingent fee and pursuant to a court award authorized by
statute are includable within her gross income under section 61.
This case was submitted and briefed before the United States
Supreme Court’s decision in Commissioner v. Banks, 543 U.S. ___,
125 S. Ct. 826 (2005). In Banks, the Court held that, as a
general rule, when a litigant’s recovery constitutes income, the
litigant’s income includes any portion of the recovery paid to an
attorney as a contingent fee. In so doing, the Court explicitly
declined to reach the issue of whether sums awarded to an
attorney under a fee shifting statute are includable in the
client’s gross income.
9 Even were we persuaded, which we are not, by petitioner’s
argument that some of her $240,000 was attributable to emotional
distress, she would still not prevail. As we pointed out supra
note 6, petitioner’s situation does not fall within the flush
language of sec. 104(a)(2) that would allow her to exclude from
her gross income any damages received for emotional distress.
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