Case Study Review Using Source Tax Documents

Dr. Tooth, a dentist from Small Town, USA, has been awarded $3,600,000 from a jury verdict due to a former patient spreading a cruel rumor about him, after having a billing disagreement. The rumor destroyed the dentist’s patient base, which caused him financial strain. After the rumor was spread and financial strain set it, the doctor’s health began to suffer. Dr. Tooth then sued the patient for defamation and intentional infliction of emotional distress. Dr. Tooth has requested that the appropriate tax treatment for his award be determined.

As the tax advisor it is one’s responsibility to find the best answer for the client’s specific situation. The taxpayer’s desired result is to always find out how much of the award is taxable and at what rate. This way the taxpayer can pay the least amount of tax allowed by law. There is also no changing the situation as the award has already been determined, so there is no need to begin tax planning.

The questions to ask when beginning research are: What court awards are taxable? At what percent are they taxable? Are attorney and court costs deductible? These questions remain the same before and after receiving the breakdown of the award. An additional question to ask after finding out that the doctor paid attorney fees is if the fee was taken from his award, or if it was to be paid regardless of the verdict.

Communication with the doctor would need to be continued on a regular basis, in order to inquire about any questions that may arise. After first speaking with Dr. Tooth, the most important information to begin research would be to find out how the award was broken down. Another question needing to be asked is if any fees were paid that may be deductible. Source documents would also need to be requested, such as court documents stating the fees and breakdown of the award.

Dr. Tooth