You Decide - John And Jane Smith

memorandum
To: bath & deoxyadenosine monophosphate; Jane Smith
From:
Date:03/25/2012
Re:Memo summarizing various tax issues
1. John Smiths tax issues:

make out a) How is the $300,000 come up to for purposes of federal tax income?

John stated that he original a lump sum of $300,000 for winning a exercise on behalf of a personal injury thickening (total bailiwick winnings $2,000,000). John questioned how the $300,000 should be taxed.

Applicable Law & axerophthol; compendium:
Per the IRS: In most cases, you must include in gross income everything you receive in payment for personal services. In addition to wages, salaries, commissions, remunerations, and tips, this includes other forms of compensation such as adorn benefits and stock options. (IRS.gov, 2012).

Conclusion:
Though the winnings were part of a personal injury lawsuit, and most claimants would refer to IRS Section 104, which states that lawsuits win in personal injury suits are non-taxable, in this case, John provided a service for compensation. Which would mean the $300,000 is taxable as income.

Issue b) How is the $25,000 treated for purposes of federal tax income?

John is questioning how to treat $25,000 in expenses that were paid up front by his client for the physical injury lawsuit.





Applicable Law & Analysis:
Per the IRS: To be deductible, a argument expense must be two ordinary and obligatory. An ordinary expense is one that is third estate and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary. (IRS.gov, 2012).

Conclusion:
The $25,000 in expenses should be deducted as a business expense.

Issue c) What is your determination regarding reducing the taxable amount of income for both (a) and (b) above?

John questioned how he could minimize the tax consequences of the $300,000 fee and the $25,000 in expenses for the personal injury lawsuit.

Applicable Law & Analysis:
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