Federal Tax Research 10th Edition by Steven Gill, Gerald Whittenburg, Roby Sawyers, Debra Sanders, William Raabe

Exercise 6

Your client, Teddy Chow, and his wife Abby filed a lawsuit to recover damages for personal injuries Teddy sustained in an auto accident in 2000. In 2004, a jury awarded Teddy $1.62 million in damages. In addition, delay damages in the amount of $1.08 million were then added to that award, resulting in a total judgment of $2.7 million. The defendants appealed the award, and while the appeal was pending, the parties reached a settlement, which provided for payment to Teddy of $2.55 million. In 2009, after attorney fees of $850,000 were subtracted, Teddy received $1.7 million. Teddy wants to know how these amounts are treated for tax purposes.
After appropriate research, write a letter to Teddy and Abby explaining your findings. Their address is 654 Hops Street, Golden, CO 78501.