Tax Case #2
200 points
ACCT 8380
Spring 2015
Dr. Smile is a 40year old dentist in Smallville, TX. He graduated from dental school five
years ago and had developed a thriving practice. However, at the end of 2014, Dr. Smile
had an ugly billing disagreement with a patient. The patient, a wellknown wealthy
entrepreneur, in retribution, maliciously spread a rumor that Dr. Smile was a carrier of a
serious infectious disease. This rumor destroyed Dr. Smile’s patient base, as most of
his patients quickly switched dentists. As a result of the stress of losing his business,
the cruel gossip that resulted from the rumor, and the financial strain caused by this
situation, Dr. Smile began to suffer from severe migraine headaches, loss of appetite,
and significant facial twitches. Dr. Smile sued the patient for defamation and intentional
infliction of emotional distress. He won a jury verdict and has since recovered
$3,600,000 in damages from the patient. The damages are as follows:
$1,000,000 lost wages. This was calculated on the basis that, in addition
to the one year of wages lost since the date of the defamation, he has lost
the ability to earn future wages in Smallville.
$50,000 reimbursement for medical expenses incurred in seeing a
neurologist, internist, and psychologist.
$20,000 for future medical expenses anticipated.
$30,000 reimbursement for attorney’s fees paid.
$2,000,000 in punitive damages. The jury determined that the action of the
patient was so malicious and heinous that he should be monetarily
punished for his actions.
$300,000 for pain and suffering.
$200,000 to compensate Dr. Smile for the emotional distress he suffered.
Dr. Smile was under the impression that the entire amount of $3,600,000 was not
taxable, and he has hired you to determine if this is true, or whether some portion of the
$3,600,000 is taxable.
Instructions
1. Find relevant authorities include code, regulations, judicial cases, and revenue
rulings. Consider the application of the following cases:
Banks v. Commissioner Supreme Court 2005
Guill v. Commissioner United States Tax Court 1999
Schleier v. Commissioner Supreme Court 1995
Threlkeld v. Commissioner U. S. Court of Appeals 1988
(Any cases that you use, should be cited properly and briefly summarized in the
Relevant Authority section)
2. Prepare a client file research memo in good form:
Facts
Issues
Relevant Authority: (Briefly summarized)
o
Statutory Authority
o
Treasury Regulations
o
Case Law
o
Treasury Publications
Analysis of Issues (Where you apply the relevant authority to your facts)
Conclusions (Address each issue)
3. Prepare a Client Letter (I will post an example for you.) Do not use technical jargon in
this letter
