Yes, taxwise the settlement is considered a reduction in the purchase price of the car and only the amount that exceeds your loss is taxable. Not attorney's fees are not deductible, so those have to be included in the settlement amount when you make the comparison between the settlement amount and the FMV of the 'lemon' car.
If any part of it is taxable, the link below has instructions. If it is not taxable, keep it with your records.
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