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ACT 4494 Income Tax Accounting I
Spring 2016, Term 3,
Tax Research Case (50 Points)
Prepare a tax research memorandum in good form (Facts, Key Issue(s), Conclusion, and
Reasoning and Authorities) to determine the proper tax treatment for each of the amounts
received by Jan Smith (a total of $40,000,000) in the following case.
You should prepare your solution in Word. Submit your case solution on Blackboard. Please
make sure that your name is on your solution. You should integrate the authorities you cite into
your reasoning in the last part. Do NOT just list the authorities you used. Cite the authorities and
explain how they apply to this case. Your authorities should include more than Code sections and
Treasury Regulations. You should have at least one court case or Revenue Ruling in your
analysis.
Facts
Jan Smith became very sick from using a particular type of soap for years. For our purposes, the
soap will be called Clean Good. She developed cancer and almost died. She is currently in
remission from the cancer because of an experimental drug she took along with many nutrients
and alternative therapies. Numerous studies conducted at several major research universities
concluded that an ingredient in Clean Good is a direct cause of the type of cancer with which Jan
suffered. Jan sued the manufacturer of Clean Good for her personal injuries on account of the
tort of gross negligence by the manufacturer. The manufacturer of the soap is called SoapCo in
this case.
The parties attempted to settle the case many times, but they could not do so. The case went to
trial. In January 2016, the trial court jury found in favor of Jan. It awarded Jan far more than
anyone had expected because the expert testimony clearly showed the causal connection in Clean
Good to the type of cancer from which Jan suffered. Moreover there was an abundance of
documentary evidence that showed that the management of SoapCo knew that Clean Good could
cause cancer for many years. They engaged in a massive scheme and coverup to prevent its
customers from learning about the cancer connection.
The jury awarded Jan $40,000,000 in damages as follows (shown on the next page):
2
Compensation for lost wages due to the cancer
Reimbursement for medical expenses that Jan has
not yet paid and are not covered by insurance
$125,000
375,000
Compensatory damages for physical illness
19,500,000
Punitive damages for the outrageous conduct of SoapCo
20,000,000
Total
$40,000,000
Be sure that your conclusions are very specific and supported by citations to authorities,
including at least one court case or revenue ruling. Be sure to address each item of income that
makes up the $40,000,000.
Hint: Begin your research by reviewing Section 61(a) and Section 104. Conduct research using
the RIA Checkpoint service located under the online databases at the Web site for the Troy
University Library. http://trojan.troy.edu/library/databases.html Once you are there, enter R and
then look for RIA Checkpoint. Choose Search, Find by Citation, and then under Current Code
enter 104 and click search. This will take you to Section 104. Once you are there, you will find
many other sources available related to Section 104.
This case is fictitious. However, you might want to read about a real case that was decided
recently that is somewhat similar. http://www.usatoday.com/story/money/nationnow/2016/02/24/johnson-johnson-lawsuit-baby-powder-talcum-ovarian-cancer-link/80845030/

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