Taxation of Damage Awards Flashcards
3 type of awards we talk about.
- property
- Lost Profits
- Personal Injury
Property awards
tax free recovery to the extend of your basis in the property.
If award isnt reinvested in the proeprty, basis is reduced by the amoun of the award. iIf award put ack into the property, its capitalized into the property so basis remainsthe same.
Lost Profits
Taxed just as if you were still oipen and you earned it. Just a substitute. Fully taxable.
Personal Injury
Pain and suffering isn’t taxable. under 104 a 2
Elements of 104 a 2
Does the award constitute damages (setlement counts)
2. Damages received on account of personal physical injury or pshyical sickness. (emotional distress isnt enough)
Policy of why pain and suffering isnt taxable.
just making the inured person whole. - no basis in human capital (cant take a loss from a terrible conditioned job)
psychic loss
win an award but never get paid, cant exclude from income.
reimbursed medical expenses
isnt taxable. unless taxpayer deducted from income in taxes previously.
Lost income
Different from lost profits. We dont tax lost income.
lost income isnt taxed because.
it was received on account of physical injury/sicknes.
policy of not taxing lost income
congress is being generous, injuured party should benefit, not bad actor.
Allocation of settlement awards
P’s want to avoid tax, so they want compensatory, not punitive.s o parties negotiate best deal for each… possible split savings in avoiding taxed awards.
Does Irs have to follow parties labels?
nope. (bank ex. and settlement after verdict ex).
Loss of consortium
wife can exclude: leg history says all damages flowing from injury are excludable, even if inured party is dead.
