Some People!

[Crank]

Long time client's child, age 26, just returned my calls stating that he wants to pick up his tax information because his Grandmom told him he should get a second opinion on whether the 1099 he received from his former employer to settle a wrongful termination suit is taxable. I told him it was and his lawyer told him its not taxable. The return was complete. Im considering charging him something for my time. Id like to be there when he gets the bill if someone else does his taxes.

[RitaB]

Yeah, that would bother me, too, but I think you'll be a winner if you just give him back his stuff and say, "Sorry it didn't work out. I'm here if you need me later." Then curse a lot after he leaves. He may just come back, but for sure, he'll bad mouth you all over town if you charge him. Nobody that's not self-employed understands.

[ILLMAS]

This is first time I ever hear something like this, TP always want a second opinion when they owe, but charge him anyway, he going to get the same respond where ever he goes.

[Crank]

Well, his mother just picked up his tax info and she stated that he just wants to show the 1099 to the lawyer. It appears he may be returning. I informed her that depending on when he comes back he may need to file an extension. Im sure that lit a fire under her butt. Needless to say I didnt charge anything and was nice as could be. I should have taken up acting.

[RitaB]

Well, his mother just picked up his tax info and she stated that he just wants to show the 1099 to the lawyer.

Oh, good, all her questions will be answered if the lawyer sees it.

[kcjenkins]

Long time client's child, age 26, just returned my calls stating that he wants to pick up his tax information because his Grandmom told him he should get a second opinion on whether the 1099 he received from his former employer to settle a wrongful termination suit is taxable. I told him it was and his lawyer told him its not taxable. The return was complete. Im considering charging him something for my time. Id like to be there when he gets the bill if someone else does his taxes.

The Service has consistently held that compensatory damages, including lost wages, received on account of a personal physical injury are excludable from gross income with the exception of punitive damages. Rev. Rul. 85-97, 1985-2 C.B. 50, amplifying Rev. Rul. 61-1; see also Commissioner v. Schleier, 515 U.S. 323, 329-30 (1995), in which the Supreme Court used an example of an automobile accident to illustrate in this employment discrimination case how “on account of” in IRC § 104(a)(2) is construed. In the example, the Court held medical expenses (not previously deducted), pain and suffering, and lost wages received by an accident victim are excludable from income as “on account of personal injuries.” Schleier, 515 U.S. at 329.

Punitive Damages

Punitive damages are not excludable from gross income under IRC § 104(a)(2).

With the enactment of SBJPA, Public Law 104 -188, Section 1605(a) in 1996, Congress made it clear in IRC § 104(a)(2) that punitive damages are taxable, regardless of the nature of the underlying claim.

Non-Physical Injury or Sickness

Prior to the amendment of August 20, 1996, the Service and the courts consistently interpreted IRC § 104(a)(2) as providing an exclusion for damages received in connection with claims of mental and emotional distress which arose from non-physical injuries. Examples of these type cases are employment wrongful discharge, discrimination, libel, etc. Please refer to Chapter 3 section on payroll and self-employment tax considerations for a discussion on FICA, FUTA, RRTA and SECA on back pay, lost wages, lost profits, etc. received in a lawsuit award or settlement.

The August 20, 1996, amendment has plainly resolved this issue on the side of the Government. With the exception of amounts paid to treat emotional distress, damages received after August 20, 1996, are excludable under IRC § 104(a)(2) only if received on account of physical injury or physical sickness. Therefore, a taxpayer receiving lawsuit proceeds from a non-physical injury claim cannot exclude any amount for payment to compensate for an intangible emotional distress value. The taxpayer can only exclude an amount for actual out of pocket medical costs. This exclusion would further depend upon whether the taxpayer had previously deducted those medical expenses on his or her tax return. See IRC §§ 111 and 213.

I'd suggest sending a copy of this snips [from the IRS Lawsuits, Awards, and Settlements Audit Techniques Guide] to both the client, client's Mom, since he already involved her, and the lawyer, if you know who that is.