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Posted by Shyster1040 on March 11, 2007, 4:09 am
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Since the judge awarded you punitive damages, that portion
of the award that constituted punitive damages is taxable
income to you. See, e.g., Lukhard v. Reed, 481 U.S. 368
(1987)("Punitive damages ... are a windfall .. rather than
compensation.").
Here, if the court accepted your argument and evidence that
your actual damages were $2,000, that should be sufficient
support for the claim that only the excess of $500
represented punitive damages.
Thus, to the extent that the then fair market value of your
car did not exceed your adjusted basis in the car, you would
not have realized any gain as a result of the "involuntary
conversion" of part of your car into cash (i.e., the
compensatory damages), and thus should not have any further
taxable income to recognize under Sec. 1033, even if you did
not spend the $2,000 (or an equal amount out of your own
pocket) on repairing the damage caused.
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