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CCH (cch.taxgroup.com) reports:

The proceeds from a settlement of a lawsuit involving a claim to ownership of a life insurance policy were taxable as ordinary income. The lawsuit was filed by a taxpayer and his wife against his former employer for, among other things, breach of an employment contract provision requiring the employer to assign the life insurance policy on the taxpayer to his wife. In settlement thereof, the employer paid an amount to the taxpayer, however, the employer retained ownership of the policy. The taxpayer's argument that the proceeds were capital gain was rejected because there was no sale or exchange of the policy as contemplated by Code Sec. 1221; rather, the proceeds were specifically for settlement of the claim.
N.C. Eckersley, TC Memo. 2007-282, Dec. 57,107(M)
Other References:
Code Sec. 1221
CCH Reference - 2007FED ¶30,422.58
CCH Reference - 2007FED ¶30,422.6555
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