Question -

Q1. Damages Awarded. As the result of a newspaper article, V claims his character was damaged beyond repair, he lost his job, and he incurred medical expenses for psychiatric care. His lawsuit requested that the court award him the following amounts $500,000 for personal injury due to slander $30,000 in lost wages and $5,000 for psychiatric care.

a. What are the tax consequences to V if he is awarded the $535,000?

b. V decides to accept an out-of-court settlement of $150,000. The newspaper and its insurer are willing to allocate the $150,000 in any manner that V requests. How should V have the amount allocated?

Q2. Debt cancellation principal residence. Five years ago, J and his wife decided that it was time to quit renting and buy a new home. They had little cash. Nevertheless they shopped around and found the perfect home. Although it was beyond their price range, they could afford it by virtue of an ultra low-interest rate. Thus they bought the home for $10,000 paying $10,000 down and financing the remaining $100,000 with an adjustable rate mortgage. This year the rate was adjusted in accordance with the terms of the agreement. As a result, J considered refinancing to get a lower fixed rate but this was not an option. There was a steep penalty for refinancing. Moreover, the value of the home had actually dropped and no one was willing to refinance a mortgage that was more than the value of their home. Fortunately, the bank did not want to become the owner of the home given the current market and agreed to reduce the debt to $90,000. What are the tax consequences to J?