FACTS Our client, Mary, wanted to add an extension to her home. She hired an arc
ID: 2486643 • Letter: F
Question
FACTS
Our client, Mary, wanted to add an extension to her home. She hired an architect who drew plans and specifications that were given out to contractors for bids. The bids ranged from $40,000 to $55,000. She hired Tony who had bid $42,000 and signed a contract to do the job at that price with payments in installments tired to progress on the job. Tony started out well but then became totally unreliable. In fact, after doing the demolition and approximately half of the framing, he just stopped coming. Try as she might Tony would not reliably attend to the job. After a year, and payments to Tony of $23,000. Mary finally had enough. She formally fired Tony and hired a contractor to finish the original job. Finishing the job cost an additional $38,000 for a total cost of $51,000 instead of the $42,000 she had originally agreed to.
QUESTION PRESENTED
Are there any tax consequences from the contract, Tony’s failure to complete, and the need to hire a replacement contractor to finish the job for a higher than contract cost?
What if Tony had in fact committed the crime of Fraud as that is defined in State Law in obtaining and executing the contract?
What would the tax effect be of suing Tony and recovering contract damages for breach of contract of $9,000 of compensatory damages and $50,000 of punitive damages?
Explanation / Answer
1. Marry spent $ 51,000 for the improvement of the house for both Tony and a new contractor. This amount is considered as cost of improvement and will be added to the original cost of the asset.Whenever asset is sold the cost of the house is taken as the total of original cost plus improvement cost. Now, there won'be any tax consequences.
2. Tony is irresponsible in his duties. He is so neglegent in performing the contract, so he will be charged for negligence and also for fraud, caused damage to Marry both physically and mentally. Negligence and fraud is liable for both civil and criminal punishment based damage occured to the victim. This damage may be for a person or for a property. Here, the damage happened to the property and also has to pay damages to Marry for her mental agony.
3. Amount receive in the award of the court ie.$9,000 is not taxable as it is the actual damage happened to Marry.But the punitive damages awarded due to fraud of Tony ie. $50,000 are treated as an income of Marry and shall be paid tax on that as per ordinary income tax rates.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.