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My client is planning to settle out of court with her
insurance company, as the agent who sold her a policy
misrepresented the terms of the policy and now my client will
be surrendering her policy. In the terms of the agreement the
Insurance company is also going to reimburse my client the tax
consequences she will incur on the growth portion of the
surrender value.

After speaking with the insurance company they stated they
will provide my client with a 1099-R for gain on the Surrender
Value. Secondly the Reimbursement Amount for the taxes on the
gain my client pays will issued a 1099-MISC.

My primary question is that will my client be taxable for the
1099-MISC distribution as well?? Being that this is a
reimbursement of the taxes the client will incur as a result
of the insurance companies mistake, and not an attempt to make
a profit, the client as well as myself don't believe it should
be treated as such.

Is there a way to report this as a special case to the IRS so
that the client isn't in actuality losing a part of the
reimbursement proceeds??

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