tax project - To: Re: S. Partner Mr. I. M. Honeyrock This...

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To: S. Partner Re: Mr. I. M. Honeyrock This letter is a response to your inquiry on the kind of treatment that Mr. I.M. Honeyrock should contribute to the compensatory damages of $100,000 for emotional distress and $50,000 for injuries to his reputation. Based on the research that I did on this subject, both the compensation for emotional distress and the compensation for injuries to reputation must be included in the taxpayer’s gross income. If we look at the Internal Revenue Code of 1954, section 104 speaks about the compensation for injuries or sickness. Section 104(a)(2) says that gross income does not include the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness. Also, for purposes of this paragraph of section 104, emotional distress shall not be treated as a physical injury or physical sickness. On the other hand if there is an amount that was paid for medical care that was attributed to emotional stress, then this amount is excludable from gross income. Under section 213(d)(1)(A) the term medical care means amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body. Under 213(d)(1)(B) it also includes transportation primarily for and essential to medical care referred to in subparagraph (A). If we look at the Treasury regulations we can find that section 1.104-1 of the Income Tax Regulations contains the explanation for the compensation for injuries and sickness. It says that section 104(a)(2) of the Code excludes from gross income the
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amount of any damages received (by suit or agreement) on account of personal injuries or sickness. The term "damages received (whether by suit or agreement)" means an amount received through a legal suit or an action based upon tort or tort type rights, or through a settlement agreement entered into in lieu of such prosecution. Workmen’s compensation is not included in the amount received. One of the first cases that illustrate emotional distress and its treatment is Burke v. United States , 929 F.2d 1119 (6 th Cir. 1991). In this case three taxpayers Therese A. Burke, Cynthia R. Center and Linda Gibbs, appeal the decision of the district court that funds distributed to them as part of a settlement agreement resulting from an action under Title VII alleging sex discrimination were not excludable as “damages received on account of personal injuries or sickness” under section 104(a)(2) of the Code. In this case the Supreme Court of the United States stated that regulation 1.104-1(c) explained personal injury for purposes of section 104(a)(2) linking to traditional tort principles. “The Court concluded that one of the hallmarks of a traditional tort liability is the
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This note was uploaded on 08/29/2009 for the course TAX TAX 596 taught by Professor Solomon during the Spring '09 term at Walsh College.

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tax project - To: Re: S. Partner Mr. I. M. Honeyrock This...

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