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Freeland Casebook Problems - Chapter 9

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FEDERAL INCOME TAX
CHAPTER 9: DAMAGES AND RELATED RECEIPTS
CASEBOOK PROBLEMS (P. 190-91; 199)
I.
Damages in General (p. 190-91)
1. Plaintiff brought suit and unless otherwise indicated successfully recovered. Discuss the tax
consequences in the following alternative situations:
a. Plaintiff’s suit was based on a recovery of an $8,000 loan made to Debtor. Plaintiff recovered
$8,500 cash, $8,000 for the loan plus $500 of interest.
The $8k repayment of the principal amount of the loan is not included in Plaintiff’s gross income.
The $2k interest payment is included in her gross income.
b. What result to Debtor under the facts of (a), above, if instead Debtor transferred some land worth
$8,500 with a basis of $2,000 to Plaintiff to satisfy the obligation? What is Plaintiff’s basis in the
land?
c. Plaintiff’s suit was based on a breach of a business contract and Plaintiff recovered $8,000 for lost
profits and also recovered $16,000 of punitive damages.
d. Plaintiff’s suit was based on a claim of injury to the goodwill of Plaintiff’s business arising from
a breach of a business contract. Plaintiff had a $4,000 basis for the goodwill. The goodwill was
worth $10,000 at the time of the breach of contract.
1) What result to Plaintiff if the suit is settled for $10,000 in a situation where the goodwill
was totally destroyed?
2) What result if Plaintiff recovers $4,000 of cash because the goodwill was partially
destroyed and worth only $6,000 after the breach of contract?
3) What result if Plaintiff recovers only $3,000 of cash because the goodwill was worth
$7,000 after the breach of contract?
2. Damages and Other Recoveries for Personal Injuries
1
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