Question

In 2017, Bob received the following award from his lawsuit against the Terminus Company:

Recovery from Lawsuit -

Physical personal injury damages $1,000,000

Emotional Distress damages 5,000,000

Attorney's Fees 600,000

Punitive damages 9,000,000

TOTAL AWARD $15,600,000

Bob has spent at total of $800,000 in attorney's fees in this lawsuit. Bob has been advised by his tax professional the personal physical injury and emotional distress (caused by the physical injury) damages, and attorney's fees are not includable in gross income, but the punitive damages are included in gross income. Further, Bob can take a deduction for his unreimbursed attorney's fees, which can be allocated completely to the punitive damage award.

a) Bob has a realized gain of $____________ for 2017.

b) Bob has a recognized gain of $_____________ for 2017.

Answer 1

A. Realized Gain for2017:

Total realized gain for 2017 is as under:

1. Physical personal injury damages $ 1,000,000

2. Emotional distress damages $ 5,000,000

3.Punitive damages $ 9,000,000

TOTAL $15,000,000

Less: Attorney's fee,unreimbursed $ 200,000

TOTAL REALIZED GAINS $ 14,800,000

Remarks: The attorney's fees is not on account of receipts of Bob ashe has to paythe fees to attorney. The difference of unrealized fees is deducted from total realizations.

B. Recognized Gains for 2017

The recognized gain are as under:

1. Punitive Damages $ 9,000,000

Less: Attorney;s fee unreimbursed $ 200,000

NET RECOGNIZED GAINS $ 8,800,000

Remarks:

As explained, only the punitive damages are includible in gross income after deducting unreimbursed feetowards attorney charges.