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Half of settlement money is excludable.

Glatthorn, an attorney, was employed by a law firm as an associate. The firm agreed to pay Glatthorn a salary plus "20% of monies he brings in in excess of his overhead." Glatthorn, suspecting his overhead was not being calculated properly, investigated and found irregularities. He demanded an adjustment. The firm fired him about two weeks later. He then sued the firm, alleging, among other things, breach of contract, civil theft and fraud.

The firm settled the case for $45,000 and issued a form 1099 showing the $45,000 as nonemployee compensation. Glatthorn included the full amount on his tax return but later filed an amended return claiming a refund. He claimed most of the settlement was in lieu of litigating the tort claims and therefore excludable under IRC section 104(a)(2) (damages received on account of personal injuries).

Result: For Glatthorn, in part. Half of the taxes paid on the $45,000 are to be refunded. The court found the settlement was in lieu of both personal injury and breach-of-contract claims, and the contract and tort claims played equally important roles in the firm's decision to settle. Thus, half of the settlement is excludable under section 104(a)(2). * Glatthorn (DC S. Fla., 1993).
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Title Annotation:Glatthorn
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Jul 1, 1993
Previous Article:Tax court strikes down home-office deduction under Soliman.
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