Question

Murray reported to the Environmental Protection Agency that his employer was illegally dumping chemicals into a river. His charges were true, and Murray’s employer was fined. In retaliation, Murray’s employer fired him and made deliberate efforts to prevent Murray from obtaining other employment. Murray sued the employer, claiming that his reputation had been damaged. Murray won his lawsuit and received an award for "damages to his personal and professional reputation and for his mental suffering." Now he would like to know whether the award is taxable. He argues that he was awarded damages as a recovery of his human capital and that a recovery of capital is not income.
1. Is Murray’s logic correct?

Answer 1

Answer:

No he is not correct.

Explanation:

The compensation for his services would be included in the tax computation however the amount that was paid to Murray as a punitive and damage compensation would not be included in the taxable income. So the only way to reduce its compensation in regard to his services (lost income) will be included in the computation because the real loss after this payment made to him by the employer is reputational  and professional damages.