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alleged, inter alia, that petitioner was discharged due to sex
discrimination under title VII of the Federal Civil Rights Act of
1964 and age discrimination under the California Fair Employment
and Housing Act (FEHA). The jury returned a special verdict on
October 13, 1995, awarding $703,000 compensatory damages for
“intentional discrimination based upon gender or age, or
negligent infliction of emotional distress” and $703,000 punitive
damages.
Merchants appealed the District Court judgment to the U.S.
Court of Appeals for the Ninth Circuit. The Ninth Circuit
affirmed the portion of the judgment for compensatory damages for
constructive discharge under title VII and FEHA. The court
reversed the punitive damages portion of the judgment.
Merchants paid petitioner and her attorneys $996,130 for the
judgment, legal fees, and court costs by a check dated March 13,
1998 (Merchants award). Merchants also paid petitioner and her
attorneys $29,385 of interest per court order (award interest).
The attorneys who represented petitioner in her case against
Merchants advised petitioners that half of the jury award was not
taxable.
On their 1998 Federal income tax return, petitioners
reported the $1,025,515 received from Merchants. Petitioner then
subtracted $417,092 for “Attorney Fees not deducted from above”
to arrive at “Net amount received by taxpayers” of $608,423.
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