Question

Determine the effect on gross income in each of the following cases:

1. Eloise received $150,000 in settlement of a sex discrimination case against her former employer.

2. Nell received $10,000 for damages to her personal reputation. She also received $40,000 in punitive damages.

3. Orange Corporation, an accrual basis taxpayer, received $50,000 from a lawsuit filed against its auditor who overcharged for services rendered in a previous year.

4. Beth received $10,000 in compensatory damages and $30,000 in punitive damages in a lawsuit she filed against a tanning parlor for severe burns she received from using its tanning equipment.

5. Joanne received compensatory damages of $75,000 and punitive damages of $300,000 from a cosmetic surgeon who botched her nose job

Answer 1

Solution:

Eloise would need to include $150000 in her gross income because this settlement would be interpreted as a compensation for compensatory damages.

Nell must include $10000 in her gross income as a compensation for her personal damage. Similarly, her punitive damages of $40000 must also be included in her gross income. So overall, Nell would include $50000 in her gross income.

This amount is for compensatory damages for non physical damages which means that $50000 should be included in gross income.

Since Beth sustained physical injuries, therefore, compensatory damages of $10000 will be excluded from gross income and punitive damages of $30000 will be included in her gross income.

$75000 will be excluded as Joanne already sustained physical injuries and $300000 wil be included.