92 T.C. 510 (1989)
FRANK E. AND MILDRED E. RICKEL, Petitioners
COMMISSIONER OF INTERNAL REVENUE, Respondent
Tax Ct. Docket No. 22936-87
United States Tax Court
March 23, 1989
P received payments in settlement of a suit against his former employer under the Age Discrimination in Employment Act, 29 U.S.C. secs. 621-634 (1985). HELD:
1. 50 percent of the settlement was allocable to a claim for a tort-like injury and 50 percent of the settlement was allocable to wage-related claims.
2. P may exclude from gross income that portion of the settlement allocable to his claim for personal injury, violation of his right to be free from discrimination on account of age. Sec. 104(a)(2), I.R.C. 1954.
3. P may not deduct that portion of his legal fee that is allocable to the portion of the settlement that is excludable from income. Sec. 265(1), I.R.C. 1954.
4. Ps did not have substantial authority for the underpayment of their taxes within the meaning of sec. 6661(b).
Dixon R. Rich, Ted Tishman, and Dixon R. Rich, Jr., for the petitioners.
Julia L. Wahl and Edward F. Peduzzi, for the respondent.
Respondent determined deficiencies in petitioners' Federal income tax liability and additions to tax for 1983 and 1984 as follows:
|| Sec. 6653(a)(1)1
|| Sec. 6653(a)(2)
|| Sec. 6661(a)
Respondent has now conceded that petitioners are not liable for additions to tax under section 6653(a). The issues remaining for decision are: (1) whether all or any portion of $80,000 and $25,000 payments petitioner received in 1983 and 1984, respectively, in settlement of a suit under the Age Discrimination in Employment Act, 29 U.S.C. secs. 621
-634 (1985), are includable in gross income; (2) whether petitioners are entitled to deduct all of the legal fees paid in relation to that suit if a portion of the settlement payments are excludable; and (3) whether petitioners are liable for an addition to tax under section 6661(a) for 1983. The parties have stipulated that if the $80,000 payment is includable in petitioners' 1983 gross income, petitioners are entitled to deduct as an itemized deduction $30,000 in legal fees paid in that year. The parties have also stipulated that if the $80,000 payment or the $25,000 payment is includable in gross income, petitioners are entitled to use the income averaging method of calculating any tax deficiency for 1983 and 1984. FINDINGS OF FACT Some of the facts have been stipulated, and the facts set forth in the stipulations are incorporated in our findings by this reference. Petitioners Frank E. and Mildred E. Rickel were residents of Pittsburgh, Pennsylvania, at the time they filed their petition. Beginning in June 1976, petitioner Frank E. Rickel (petitioner) was employed by Malsbary Manufacturing Company (Malsbary), Uniontown, Pennsylvania, as general sales manager. Petitioner was an employee at will and worked without an employment contract. Malsbary, a subsidiary of Carlisle Corporation (Carlisle), manufactured industrial cleaning equipment. In an interview prior to his employment, petitioner was told by the president of Malsbury, Frank Smith (Smith), and by the president of Carlisle, Malcolm Myers (Myers), that he would be considered for the presidency of Malsbary when the position became available. During the term of petitioner's employment, Malsbary prospered and in 1978 realized a record year both in sales Page 512
and profits. After Malsbary terminated petitioner's employment on August 15, 1979, the company's profits began to decrease. Malsbary went out of business in 1986. In March 1979, when the position of president became available at Malsbary, petitioner was 59 years old. Despite petitioner's qualifications, Malsbary hired a 42-year-old individual as corporate president. Subsequently, the new Malsbary president told petitioner that he was not given the position as president because Myers wanted someone younger. The new Malsbary president also informed petitioner that he wanted a younger person as general sales manager. Petitioner was relieved of his duties as general sales manager, placed on partial pay, and ultimately discharged on December 31, 1979. Malsbary hired a 37-year-old individual as general sales manager. During the period of his employment at Malsbary, petitioner received the following compensation for his services:
Petitioner also received $6,000 in termination pay for the period September through December 1979. By letter dated August 25, 1980, the Equal Employment Opportunity Commission advised petitioner of his right to institute legal action against Malsbary for age discrimination. On November 18, 1981, petitioner filed an amended complaint in the United States District Court for the Western District of Pennsylvania. Petitioner's suit, under the Age Discrimination in Employment Act (ADEA), 29 U.S.C. section 621
et seq. (1985), and the Fair Labor Standards Act (FLSA), 29 U.S.C. section 201
et seq. (1982), was against his former employer Malsbary and its parent corporation Carlisle. Petitioner's amended complaint included various prayers for relief, as follows: A. Order defendants jointly and/or severally to employ the plaintiff as President of Malsbary; or in the alternative to reinstate plaintiff to his former or a comparable position; B. Order the defendants jointly and/or severally to pay back wages, benefits and other compensations found by the Court to be due plaintiff, Page 513
together with interest thereon from the date when such amount became due; C. Grant a judgment requiring defendants jointly and/or severally to pay appropriate back wages and an equal sum as liquidated damages, to plaintiff who has been adversely affected by the unlawful employment practices described herein; D. Award counsel for plaintiff reasonable attorney's fees and expenses; E. Award any further relief which is appropriate and proper under the circumstances. In January 1983, petitioner's suit was tried before a jury. Judge Maurice B. Cohill, Jr. (Judge Cohill) presided at the bifurcated trial. The jury was to make an initial determination on liability. Assuming the jury returned a verdict favorable to petitioner on liability, they would then decide the issue of damages. Four special interrogatories were submitted to the jury, as follows: (1) Was plaintiff, Frank E. Rickel, qualified in April 1979 for the position of President of Malsbary Manufacturing Co.? (2) Was age a determinative factor in the decision not to promote the plaintiff? (3) Was plaintiff, Frank E. Rickel, qualified in August 1979 for the position of General Sales Manager of Malsbary Manufacturing Co.? [and] (4) Was age a determinative factor in the decision to discharge the plaintiff from his job as General Sales Manager? While the jury was deliberating its answers to these interrogatories, counsel for the plaintiff and counsel for the defendant informed Judge Cohill that a settlement had been reached. Subsequently during a settlement conference in Judge Cohill's chambers, the parties entered into a Stipulation To Settle and Discontinue. The terms of the settlement, which dismissed petitioner's lawsuit with prejudice, depended on how the jury answered the four special interrogatories. Under the terms of the settlement, if the jury answered ‘ yes‘ to all four interrogatories, Malsbary and its parent Carlisle would pay petitioner $80,000 immediately and $25,000 each year for the next four years. The $180,000 gross settlement amount was not allocated among the various damage claims asserted in petitioner's amended complaint. The jury answered all four interrogatories affirmatively. Page 514
Carlisle made the first payment of $80,000 to petitioner's attorney in 1983. The attorney withheld $30,000 as his fee and remitted $50000 to petitioner. During the succeeding 4 years Carlisle made annual payments of $25,000 to petitioner's attorney, who remitted the payments in full to petitioner. Petitioner's attorney received remittance advices with each of the payments from Carlisle, as follows:
|| Legal and Professional/Damages
|| Settlement Jan. 11, 1983
|| 1985 Litigation settlement payment
|| 1/11/86 Litigation settlement payment
|| 1/11/87 Litigation settlement payment final installment
Carlisle filed Form 1099-Miscellaneous Income for each settlement payment, entering the appropriate dollar amount in the box entitled ‘ Nonemployee compensation.‘ Carlisle did not withhold Federal income taxes or Social Security taxes from any of the litigation settlement payments. Petitioner prepared his own Federal income tax returns for 1983 and 1984. Prior to preparing his 1983 tax return, petitioner questioned Carlisle about the form that it had used to report the initial settlement payment. Carlisle responded that: Our tax department has looked at this issue and have concluded that if the payments made to you are considered ‘ liquidated damages‘ instead of a back pay award (the latter subject to withholding and FICA taxes) the income...