It was a dark and stormy night and a Camp HavaBlast in the Woods van was traveli

Question

It was a dark and stormy night and a Camp HavaBlast in the Woods van was traveling westbound on US Route 2 near Deer River, Minnesota. The van was returning a busload of teenagers from a summer camping trip through the northern Minnesota woods. Suddenly, the driver loses control of the van and the van flips over along the side of the road and many of the passengers are seriously hurt. Paramedics are rushed to the scene. However, unfortunately, they are too late to help 15-year-old Henry Tyler, as he is pronounced dead on arrival at the local hospital. After a brief period of mourning, Mr. and Mrs. Tyler file a wrongful death lawsuit against Camp HavaBlast in the Woods for loss of the companionship and services of their son, Henry. The camp, which is insured for liability up to $400,000 per incident, agrees to settle the case for $300,000. The settlement is approved by the court and $300,000 is paid to Mr. and Mrs. Tyler as a result of the settlement. When preparing their income tax return for that year, Mr. and Mrs. Tyler ask you whether they need to report and pay income tax on the $300,000 settlement. Please prepare an essay answering this question and explaining to Mr. and Mrs. Tyler why they do or do not have to pay income tax on the settlement money.

Explanation / Answer

Mr. and Mrs. Tyler will not have to pay any taxes on the settlement amount of $300,000 that they have received as a settlement from Camp HavaBlast following their wrongful death lawsuit against the camp. This is because IRS does not tax the compensatory portions of settlements. Here the settlement is intended to compensate the Tylers for their loss and hence will be regarded as compensatory damages.

It will not be regarded as punitive damages as the actions were not proved as either deliberate or irresponsible in the court. Punitive damages are taxable. In this case a settlement was reached and the settlement was approved by court. Hence it will not be treated as exemplary damages or punitive damages, but will be regarded as compensatory damages as the death of Henry Tyler was because of driver’s mistake but it was neither a deliberate action nor an irresponsible action.

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.