damages& divorce lecture.pdf

damages& divorce lecture.pdf - TA 318 Damages and...

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TA 318 Damages and Insurance Marriage and Divorce
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TA 318 Damages and Insurance 2
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Key Code Sections § 104 Taxation of payments by third party or from insurance policy not purchased by employer § 105 Taxation of payments by employer or from insurance policy purchased by employer § 106 Taxation of health insurance policy premiums paid by employer 3
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Problem 1 Ira was injured when an automobile hit him. The driver and Ira settled at the scene of the accident for $5,000 for Ira’s physical injuries. What are the tax consequences to Ira? 4
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Problem 1 (cont d) Damages received on account of personal physical injuries, whether by suit or by agreement , are excluded from income § 104(a)(2) Entire $5,000 excluded See also Treas. Reg. § 1.104-1(c) 5
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Problem 2 Barry, a professional baseball player, brought suit when Carl spilled acid on Barry’s arm. Barry recovered the following in damages: $500,000 for pain and suffering, $50,000 reimbursement of all Barry’s medical expenses, $750,000 for lost salary, $50,000 for emotional distress and $100,000 in punitive damages. What are the tax consequences to Barry assuming he has not previously deducted any of the medical expenses ? 6
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Problem 2 (cont d) Which of these damages, if any, are excluded? $750,000 for lost salary $50,000 reimbursement of medical expenses $100,000 in punitive damages $500,000 for pain and suffering $50,000 for emotional distress 7
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Problem 2 (cont d) $750,000 for lost salary 8
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Problem 2 (cont d) $750,000 for lost salary Damages on account of personal physical injury are excluded by § 104(a)(2) Lost wages recovered on account of personal physical injury are excluded even though it is replacing salary which would have been ordinary income when earned. Rev. Rul. 85-97, 1985-2 C.B. 50 9
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Problem 2 (cont d) $50,000 reimbursement of medical expenses 10
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Problem 2 (cont d) $50,000 reimbursement of medical expenses Excludable 11
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Problem 2 (cont d) $100,000 in punitive damages 12
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Problem 2 (cont d) $100,000 in punitive damages Not excludable Punitive damages remain excludable in certain wrongful death actions § 104(c) Just in Alabama 13
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Problem 2 (cont d) $500,000 for pain and suffering 14
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Problem 2 (cont d) $500,000 for pain and suffering Damages for pain and suffering on account of personal physical injury are excludable 15
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Problem 2 (cont d) $50,000 for emotional distress 16
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Problem 2 (cont d) $50,000 for emotional distress No exclusion for emotional injuries. § 104(a) (flush language) However, damages for emotional distress resulting from personal physical injury are still excluded. Treas. Reg. § 1.104-1(c)(1); HR Rep. No. 586, 104th Cong., 2d Sess. 144 (1996) His award for emotional distress is excluded! 17
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Problem 3 How would your answer to Problem 2 change if, in a prior year, Barry deducted $10,000 in medical expenses incurred for an eye operation required to repair injuries caused by Carl?
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