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The Tax Court applied the origin of the claim doctrine in Blum v. Commissioner, T.C. Memo. 2021-18, Holliday v. Commissioner, T.C. Memo. 202169, and Tressler v. Commissioner, T.C. Summ. Op. 2021-33, to evaluate tax consequences of settlements. In each case, the Tax Court held that the damages the taxpayer received in the settlements were includible in gross income.
Facts
In Blum v. Commissioner and Holliday v. Commissioner, the taxpayers sued attorneys for malpractice, alleging that the attorneys breached their duty of care for failing to properly prosecute lawsuits. In both cases, the taxpayers and the attorneys entered into a settlement agreement and the taxpayers excluded the damages received from gross income.
The taxpayer's initial suit in Blum was for personal injuries. The taxpayer received $125,000 to settle the dispute with her attorneys after losing the personal injury lawsuit. The settlement agreement stated that its purpose was to settle a malpractice claim and that the taxpayer did not sustain any physical injuries as a result of the alleged negligence of her former attorney.
In Holliday, the initial lawsuit was a divorce action. The attorney paid the taxpayer $175,000 to settle the malpractice lawsuit. The settlement agreement indicated that the purpose...