Hi & thanks for using our service. I'll do my best to give you a complete & accurate answer. Please ask me to clarify anything you don't understand.
The 2006 tax year is closed as far as amending returns.
If the expenditures you made because of the suit were related to payroll, ie. the settlement expenditures & legal costs, then I would consider filing a business schedule C for those years by amending your 2007 & 2008 returns. The statute of limitations on 2007 will expire in 2011 on the comparable date in 2008 that you filed your return for 2007, including extensions, or 4/15/2008 if you filed your return before 4/15/2008.
You'll need to tell me a little more about the nature of the suit and settlement before I can give you my final recommendation as to what to do............