Dean is a singer. After a singing engagement in a night club in Dallas, an article in Dallas City magazine identified him as a local celebrity who had a drug dependency. Dean sues the magazine for slander. The court determines that the article is false and awards Dean $20,000 for humiliation, $50,000 for loss of singing engagements, and $175,000 in punitive damages. Which of the following statements about the receipt of these payments is/are correct?
I.The $50,000 for loss of singing engagements is taxable.
II.All of the payments are nontaxable because they are made on account of injury to Dean's reputation

Question

Dean is a singer. After a singing engagement in a night club in Dallas, an article in Dallas City magazine identified him as a local celebrity who had a drug dependency. Dean sues the magazine for slander. The court determines that the article is false and awards Dean $20,000 for humiliation, $50,000 for loss of singing engagements, and $175,000 in punitive damages. Which of the following statements about the receipt of these payments is/are correct?
I.The $50,000 for loss of singing engagements is taxable.
II.All of the payments are nontaxable because they are made on account of injury to Dean's reputation
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Quizplus · Accepted Answer

Only the $20,000 for humiliation and $175,000 in punitive damages are nontaxable as they are considered damages for personal injury. However, the $50,000 for loss of singing engagements is considered taxable income as it is compensation for lost wages.

Dean Is a Singer