Rese Note: Solutions to the Research Problems can be prepared by using the Thoms

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Rese Note: Solutions to the Research Problems can be prepared by using the Thomson THO Reuters Checkpoint Student Edition online tax research database, which accompa- Ch nies this textbook. Solutions can also be prepared by using research materials found in a typical tax library Research Problem 1. Murray reported to the Environmental Protection Agency that his employer was illegally dumping chemicals into a river. His charges were true, and Murray's employer was fined. In retaliation, Murray's employer fired him and made deliberate efforts to prevent Murray from obtaining other employment. Murray sued the employer, claiming that his reputation had been damaged. Murray won his lawsuit and received an award for "damages to his personal and professional reputa- tion and for his mental suffering." Now he would like to know whether the award is taxable. He argues that he was awarded damages as a recovery of his human capital and that a recovery of capital is not income. Therefore, the Federal government does not have the power to tax the award. Research Problem 2. The employees of the city of Greenville must make mandatory contributions to the city's postretirement health benefit plan. The employees' contri- butions are placed in a trust and are used exclusively for the employees' benefits The employees believe that because they are required to make the contributions from their base salaries, the result should be the same as if the employer made the

Explanation / Answer

Problem 1

Under Form 1099-MISC it is compulsory to report payment of over $ 600 Per Calender year to the IRS and Payee. this requirement includes reporting of the settlement payments and damage awards if any.

Under Form 1099-MISC taxable damage paid to be reported under box - 3 of Form 1099-MISC under which 4th option All other taxable damages which include Payments for damage to reputation , Defamation of character or libel are other taxable damages under the USA Federal tax law.

So, as per above clarification the award received by the Murray as an award from law suit is taxable under USA Federal Tax and they have power to tax the same so contention of the murry that the amount received is for human capital and not a recovery of capital so it is not income will not stand in law and he has to pay the tax as per the Current slab rate of USA.

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