Dr. Tooth is a 40-year-old dentist in Small Town, USA. He graduated from dental school five years ago and has had a thriving practice ever since. At the end of last year, however, Dr. Tooth had an ugly billing disagreement with a patient. The patient, a well-known wealthy entrepreneur, in retribution, maliciously spread a rumor that Dr. Tooth was a carrier of a serious infectious disease. This rumor destroyed Dr. Tooth'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. Tooth began to suffer from severe migraine headaches, loss of appetite, and significant facial twitches. Dr. Tooth 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.
This award was broken into the following categories:
i. $ 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, Dr. Tooth has lost the ability to earn future wages in Small Town.
ii. $50,000 reimbursement for medical expenses incurred in consulting a neurologist, internist, and psychologist.
iii. $20,000 for future medical expenses anticipated.
iv. $30,000 reimbursement for attorney's fees paid.
v. $2,000,000 in punitive damages. The jury determined that the action of the patient was so malicious and heinous that the patient should be monetarily punished for his actions.
vi. $300,000 for pain and suffering.
vii. $200,000 to compensate Dr. Tooth for the emotional distress he suffered.
Through your interview with the client, you discover that he had to pay his attorney $50,000, which was paid out of the award.
a. Write a memo to your supervisor communicating your research results.
b. Write a letter to Dr. Tooth communicating your research results.
c. Assume that a previous tax advisor signed the client's return reporting none of the damages. Client has just received a letter from the IRS indicating that Dr. Tooth owes substantial taxes on the amount he should have included in income. The IRS's position is that all of the damages award should have been included in gross income. Write a protest letter to the IRS on behalf of Dr. Tooth.