Liquidated damages

[Pacun]

Do you know if Liquidated damages are taxable?

[BulldogTom]

They should be taxable to the reciepient and deductible by the payer.

Tom

Hollister, CA

[jainen]

>>Liquidated damages are taxable?<<

That's one of those terms that you can't assume is being used correctly, so read the paperwork. It's supposed to mean a payment for breach of contract, such as forfeiting a deposit on a real estate contract. I've seen it argued as capital gain, but that doesn't work because no capital asset was transferred. Others say a basis adjustment, which has a certain logic, but can't cite any authority. So it's ordinary income on Line 21, with any related expenses on Schedule A.

On the other hand, I don't think the buyer can deduct it. It is not an investment expense, since the obligation to pay arose from the breach of contract instead of an intention to complete the purchase.

[BulldogTom]

I am assuming this is in a business context where the liquidated damages are part of a contract. Maybe a bad assumption, but since I work in the Construction industry, I gravitated to the things I see in this industry.

Tom

Hollister. CA

[Pacun]

In this case, I asked the taxpayer to ask the attorney and the attoeny said to me "it is liquidated damages."

It is a breach of a tacit contract. Employee was fired unjustly and they XXK amount of money in back pay and an exact amount for "liquidated damages" based on the new labor or family law of 2006???? (I wasn't paying that much attention). I asked the attorney if they were asking for "suffering" compensation and she said "NO". At that point I knew it was a line 21 item.

TP got two forms, one W-2 for XXK amount with deductions and a 1099 for the same amount as other income. I just wanted to double check with the attorney if suffering was involved to make a portion of the 1099 not taxable but she said no.

Thank you for the replies, you guys are the best!!!!