Good Example Of Essay On Tax File Memorandum

Taxable Income: Issues

Earlier this week, I met a client, Mr. Murray who was suspended and demoted from his position by his employer on grounds that he had notified authorities of illegal environmental activities at the workplace. He was later dismissed and the employer refused to write him a letter of recommendation. He consequently sued his employer and won. He received payments for damages to his personal as well as professional image and his mental ordeal.

Issue

The issue here is whether Mr. Murray should receive taxation for his damages to professional and personal image and for the compensation on mental suffering. Mr. Murray presents the argument that the reward was a recovery of human capital.
In accordance to Section 61 (Code § 61) of the IRC, it is stated that all manner of income from any source is taxable. The only exception given is when another Code section specifically excludes taxation on the same. Code § 104 provides this exclusion from taxable income. It provides stipulations on settlements, lawsuits and awards. Additionally, IRC Code § 63 has defined taxable income as the gross income excluding deductions allowed. In the 1996 Amendment, the term physical was added to the clause in the IRC Code § 104 (a) (2). Personal physical injuries or sickness was added to the exception.
Therefore, for damages and awards to qualify as tax exempts in terms of income, the injuries or damages causing the awards and damage payment must be physical illness or physical injuries. Nonetheless, the clause was not so clear before the 1996 amendment on the issue of definition of personal injuries. Therefore, the amendment included IRC Code § 104 (a) that states that for the purpose of paragraph (2), emotional suffering shall not amount to physical illness or injury.
In the same way, the 1996 amendment is clear that all punitive damages shall not be taxable under IRC Code § 104 (a) (2) regardless of whether the damages were physical or otherwise. A recent case involving Darrin F. Suder, et UX. V. Commissioner the Tax Court found that tort recoveries for a number of claims that included emotional suffering, was not excludible. This follows IRC Code § 104 (a) (2) since the recoveries were not received on accounts of personal physical illness or injuries.
For case No. 04-72672 Gavin Polone V. Commissioner, Gavin Polone filed a lawsuit against his employer for termination of employment and defamation. He received $4 million as award. IRC Code § 104 (a) (2) and IRC Code § 61(a) were used to make a ruling that every income was taxable since it involved defamation and wrongful termination of service, despite causing emotional distress. There were no relations to physical illness or injuries.
Additionally, a lawsuit filed for defamation by Roemer, JR. V. Commissioner led to the former winning and the award money was taxed since there was no relation to personal injury and therefore the amount received amounted to accession of wealth.

Conclusion

Based on the above presented facts, Mr. Murray was awarded for damages to his personal as well as professional image and his mental ordeal. As provided above, IRC Code § 104 (a) (2) and IRC Code § 61(a) are clear in what needs to be done. Code § 61(a) provides that all income is taxable no matter the source of income. However, IRC Code § 104 (a) (2) has exceptions that tie an exempt of the above to physical injury or illness. For this case therefore, the rewards are taxable since they do not relate to personal physical illness or injury.
CPA

Works Cited

100 AFTR 2d 2007-6277 (505 F.3d 966), Code Sec(s) 104; 1001; 104, (CA9),
10/11/2007
Gavin Polone, TC Memo 2003-339, Code Sec(s). 104; 6662; 7491, 12/16/2003
ROEMER v. U.S., 95 AFTR 2d 2005-845, (Ct Fed Cl), 01/11/2005