The legislative and regulatory history surrounding the PTC's haircut provisions suggests that grants and direct loans (but not loan guarantees) provided under the Section 9006 program will cause a PTC haircut. Having the proper documentation to support your position will ease this issue with a properly worded response to the IRS to clear up the notice. Determine whether the payment, in whole or in part, is WAGES. WebDamage payments: The tax treatment of various types of damage payments can vary depending on the type and reason for the payment. Rev. The interest is treated as income and must be reported to the IRS. Learn about taxes, budgeting, saving, borrowing, reducing debt, investing, and planning for retirement. For additional information about these items, contact Ms. Turgeon at 973-202-6615 or christine.turgeon@pwc.com. Prior to this ruling, the payments were not excludable and were thus taxable as income for the taxpayer. It may not benefit you though, as it is an itemized deduction, so if you take the standard deduction, you will get no benefit from it. Taxable gain (amount by which the proceeds exceed the tax basis of the property) results when a property is taken by condemnation (or sold under threat of eminent domain). Agricultural supply dealer liensintended to encourage suppliers to provide necessary feed and supplies to agricultural producerscan be difficult to enforce. Crop damages to a farmer are taxable Farm income on Schedule F. If you have been filing a farm schedule in prior years and negotiate crop damage, this income will be considered farm income and be subject to self-employment taxes. The 1099 reporting by the payer can definitely cause issues even a couple years after filing due to the IRS matching program. So what does this mean for you? For tax purposes, payments to secure a temporary or term easement are generally treated as rent payments. The law on taxation of damages is murky and the IRS closely scrutinizes payments for damages. A taxpayer may satisfy the establishment requirement by providing documentary evidence of certain elements. Read ourprivacy policyto learn more. The pipeline company pays him $12,000 for actual and future damage to his crop caused by the pipeline. He receives a Form 1099-S reporting the transaction. By using the site, you consent to the placement of these cookies. Payments for current damages may generally be offset against the landowners cost basis. 635 (N.D. Ala. 1986). The receipt or payment of amounts as a result of a settlement or judgment has tax consequences. WebPunitive damages are taxable and should be reported as Other Income on line 8z of Form 1040, Schedule 1, even if the punitive damages were received in a settlement for Similarly, a The first group includes claims relating to physical injuries, and the second group is for claims relating to non-physical injuries. Burden is on the taxpayer to prove actual damages occurred to substantiate any return of capital. 61-1 amplified. Fax: (515) 294-0700. 2006, Berkeley Lab published an LBNL/CESA case study that examined the financial impact of EPAct 2005's solar tax credits on PV system owners, in light of the $2,000 cap on the residential credit, as well as the fact that most PV systems in the U.S. also receive cash incentives from state-, local-, or utility-administered PV programs, and that these cash incentives may reduce the value of federal tax credits in certain situations. Determine if any of the lawsuit, award or settlement proceeds constituted punitive damages. Anticipatory Damages are ordinary income. Notice 95-45 superseded. Certain payments are nondeductible (as explained further below), and others must be capitalized, such as when the payer obtains an intangible asset or license as a result of a settlement. Awards and settlements can be divided into two distinct groups to determine whether the payments are taxable or non-taxable. The bill describes adjustments to income which will be allowed: dividends received; gains and losses from sales or exchanges of capital assets; income from retirement or discharge of bonds, etc. 72-342, 84-92, and 93-88 obsoleted. Damages received to compensate for economic loss, for example lost wages, business income and benefits, are not excludable form gross income unless a personal physical injury caused such loss. In litigation, attention is often focused solely on the amount of the awarded damages. Ames, Iowa 50011, Phone: (515) 294-5217 Such projects are also typically eligible for the Federal Production Tax Credit (PTC) codified in Section 45 of the US tax code. Treatment of Payments to Attorneys - IRC 6041 and 6045 state that when a payor makes a payment to an attorney for an award of attorney's fees in a settlement awarding a payment that is includable in the plaintiff income, the payor must report the attorney's fees on separate information returns with the attorney and the plaintiff as payees. In light of these substantial changes to the solar ITC, this report takes a fresh look at the value of these revised credits, focusing specifically on the Section 25D residential credit. 85-98). Flood insurance policies typically cover physical damage to buildings and personal property. 265). Therefore, your property damage settlement may be taxable. The tax free exchange requirements are stringent and the transaction should be properly structured before the easement is signed and any payments are received. This site uses cookies to store information on your computer. The character and written agreements related to these payments will determine where they should be reported on your return. 513 Farmhouse Rd. You need to report the settlement as income on your tax return. This report describes a comparative analysis of the cost of public policies to support financing for two end-use solar technologies: residential solar domestic hot water heating (SDHW), On August 8, 2005, the Energy Policy Act of 2005 (EPAct 2005) increased the Section 48 investment tax credit (ITC) for commercial photovoltaic (PV) systems from 10% to 30% of the project's 'tax credit basis' (i.e., the dollar amount to which the ITC applies), and also created in Section 25D of the Internal Revenue Code a new 30% ITC (capped at $2,000) for residential solar systems. Can I deduct the cost of repairs? You may have liens on your property. If you fail to heed this warning, Uncle Sam may end up with a larger share of your easement payment than you anticipated. In a January 27, 2023, opinion, the Iowa Supreme Court found that a joint tenancy with rights of survivorship was converted to a tenancy in common when one of the owners transferred her undivided As the 2023 filing season begins, taxpayers and their preparers must sort through new guidance and rules to determine their requirements for the 2022 tax year. The gain is reported on Form 4797, Sales of Business Property. For the payer, the origin-of-the-claim test determines whether the payment is deductible or nondeductible, currently deductible, or required to be capitalized. /{mx3Na sft~zCY!btNpiOrv1O#M^@At0'cwd~bq"``$OGG)4Bu#=NfeaK}"/_O?5Gt?N6!L0fzv+&6\Fd"~d| '/jktp51 9[L(KdZZ7&n|_F)|@/LbT}' 4+z'd=$XFCAj?$=(6w|6Ke`3cT.rP.s(0A~>!,'8spI7H0wp72a It then discusses subsidized energy financing and the potential negative tax implications of this type of program. Reg. The IRS will tax it if you're awarded punitive damages. A payment arising from a business activity may be deductible under Sec. However, the facts and circumstances surrounding each settlement payment must be considered to determine the purpose for which the money was received because not all amounts received from a settlement are exempt from taxes. 162(c), which applies to illegal bribes and kickbacks, and Sec. However, certain damages may be excludable from income if they represent, for example, gifts or inheritances, payment for personal physical injuries, certain disaster relief payments, amounts for which the taxpayer previously received no tax benefit, cost reimbursements, recovery of capital, or purchase price adjustments. His allocated basis in the property impacted by the easement is $40,000 (5/160 x $1,280,000). Rev. Though financing does not reduce the high up-front cost of PV, by spreading that cost over some portion of the system's life, financing can certainly make PV systems more affordable. %PDF-1.7
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Determine whether the payment, in whole or in part, is INCOME to the recipient. In California alone, the cities of Santa Cruz, Santa Monica, and Palm Desert are all reportedly considering similar programs, while the city of San Francisco has recently announced its own program, portions of which closely parallel Berkeley's approach. News and events, industry updates, legal insights. For landowners considering a pipeline easement an ounce of prevention is worth a pound of cure. If it is impossible or impractical to separate the basis of the part of the property on which the easement is granted, the basis of the whole property is reduced by the purchase price. With the exception of "pain and suffering" (of which I don't see any of that here), all rental income received for rental property from any source for any reason, is included in the total of all rental income received for the tax year. I may try a different method to file. All punitive damages are taxable whether received in relation to a physical or non-physical injury or sickness. Public policies to support financing for renewable energy technologies must pay special attention to interactions with federal, state, and local taxes. and residential rooftop photovoltaic (PV) systems. Comr., T.C. Under this doctrine, a settlement or arbitration payment, if it constitutes damages for loss of profits, is generally taxable as ordinary income. Take before and after digital pictures from lots of angles. In some cases, a tax provision in the settlement agreement characterizing the payment can result in their exclusion from taxable income. Despite its name, emotional distress is sometimes a symptom of an accident, home intrusion, or other type of physical harm. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. B{Fz&0*C@8 yPW(*%a3z{pbO;s>f|fH^t|>q8:N=zWf N'R9S[9\-Eo;xK9BNGC|en(_L=S#m6+i:N4p'.0aUq\^$TmI7gH/cLCA"`fm
GIa'C.h9|d As a result of the amendment in 1996, mental and emotional distress arising from non-physical injuries are only excludible from gross income under IRC Section104(a)(2) only if received on account of physical injury or physical sickness. Where the payment relates to a capital asset (such as a property or shares), it will usually be capital in nature. Damages which are income If the damages are income in nature they will only be taxable if they fall within one of the categories of taxable income such as receipts of a trade or profession, receipts from a property business, savings income or employment income. Surface damagepayments are commonplace in landowner-mineral lessee relations. Nfpk:2dg+|,|[tz*{qAzwgjJg8grc6lX:^+GAUGF"|1wQ1
2o5e~Q7 An IRS FAQ clarifies that the attorneys' fees disallowance does not apply to the victim's attorneys' fees (see irs.gov/newsroom/section-162q-faq). Damages generally are taxable as ordinary income if the payment relates to a claim for lost profits, but they may be characterized as capital gain (to the extent the damages exceed basis) if the underlying claim is for damage to a capital asset. Consequently, defendants issuing a settlement payment or insurance companies issuing a settlement payment are required to issue a Form 1099 unless the settlement qualifies for one of the tax exceptions. The most popular flood policies have limits of $250,000 for a home and $100,000 for the personal property contained in the home, with a $500 deductible. The key question to ask is: "What was the settlement (and its corresponding payments) intended to replace?". The disallowance does not apply to payments for restitution (including remediation of property) or to come into compliance with law; taxes due; or amounts paid under court orders when no government or governmental entity is a party to the suit. You'll claim your legal fees for this in the rental expenses section in the Miscellaneous Expenses section, which is the very last screen of the rental expenses section. Auto-suggest helps you quickly narrow down your search results by suggesting possible matches as you type. The tax treatment of these payments vary, depending upon the nature of the damage and whether the payment is for loss of profits, or for loss or injury to capital. Damage payments representing of the excess profits taxable income. 987 foreign currency regulations applicability date extended again, The Inflation Reduction Acts energy- and climate-related tax provisions. In order to determine the correct treatment, the payment must be considered in the light of the claim from which it was realized. Where the damages relate to an underlying capital asset then the claimant is taxed as if it has sold part of the asset. However, where there is no underlying asset the damages can be tax exempt. A good example of a claim with no underlying asset would be a professional indemnity claim for misleading tax or financial advice. Documentation of letters or statements that address the taxation of the settlement proceeds. Because punitive damages are rarely awarded in conjunction with compensatory damages, you can easily distinguish them from each other. The type of damage sustained determines the tax treatment of the payment received. Taxpayers should consider these issues during a litigation or arbitration process. I worked for the I.R.S. Because Berkeley appears to have the most-well-developed proposal at the moment, this case study begins by describing Berkeley's program, as currently planned, in more detail. Should I report the repairs? Trademark and Copyright Prosecution and Licensing, Policy Development and Workplace Training, Estate Planning, Probate, and Trust Administration, Non-Compete and Other Restrictive Covenant Disputes. Under former Section 104(a)(2), back pay received to satisfy such a claim was not excludable from gross income, but damages received for emotional distress are excludable. Been preparing taxes professionally for 10+ years. All rights reserved. These payments are typically reported to the landowner on a 1099-MISC. Punitive damages and interest are always taxable, even if your injuries are 100 percent physical. Discrimination suits for age, race, gender, religion, or disability can generate compensatory, contractual and punitive awards, none of which are excludible under IRC Section104(a)(2). If the written easement document does not include sufficient detail regarding how payments should be categorized, the pipeline company will unilaterally allocate the payments in a manner which is most advantageous to the pipeline company. This was part of a legal settlement for a pipeline. Copyright 2023 Iowa State University of Science and Technology. I have written documentation in the settlement that this amount is for damages, **Say "Thanks" by clicking the thumb icon in a post, BBA- Specialization: Accounting, MBA- Specialization: Asset Management, EA. An official website of the United States Government, The general rule regarding taxability of amounts received from settlement of lawsuits and other legal remedies is Internal Revenue Code (IRC) Section 61. There is nothing wrong with negotiating a damagevalue on your property but consult your CPA to understand the tax implications. I received a 1099 MISC for property damages due to construction. Basis is not what you think your property is worth or what it is appraised at currently. k. The taxable amounts received will depend on how the lawsuit proceeds were labeled. If the proceeds were given solely to compensate you for property damage, that is not taxable income and you will enter the amount on line 21 of your return and then take it out as a negative to show the IRS. However, as a general rule, the IRS views the initial complaint as most persuasive (see Rev. WebPayments for damages can be taxable as income, or can be nontaxable as a return of capital. Any payment received from a utility for permanent access easement is considered a sale of property, not treated as income or taxed in the year received. XIXfP$TEM#YiQMS?6zbn?5mpk>a*es 4|. /gZO. 163, 164, or 165). All types of Damages are reportable on your tax return. Note: In addition to your qualified rental expenses, you may be eligible to deduct an additional 20% of your qualified business income (QBI) if you meet all of the safe harbor requirements; refer to Revenue Procedure 2019-38 PDF and Tax Cuts and Jobs Act, Provision 11011 Section 199A - Qualified Business Income Deduction FAQs. WebInsurance funds received for business property damage are taxable if the amount received exceeds the farmers basis in the property damaged and the farmer does not fully reinvest the proceeds in the replacement property. If construction occurs when a crop is not already growing and it cannot be planted, the farmer may also receive a payment for loss of income. After first setting the stage by briefly reviewing our previous findings, the document proceeds to cover four specific areas in which the removal of the $2,000 cap on the residential ITC will have significant implications for PV program administrators, PV system owners, and the PV industry that go beyond the obvious market growth potential created by these more-lucrative federal incentives. Landowners must support damage claims. Suppose you are injured in a car crash and receive $50,000 in compensatory damages and $5 million in punitive damages. An energy plowback deduction is also allowed, not to exceed 25 percent, Renewable energy technologies are capital intensive. The easement affects five acres of Lionels property. Employment-related lawsuits may arise from wrongful discharge or failure to honor contract obligations. In order to determine the correct treatment, the payment must be considered in Because the PTC provides a significant amount of value to a wind project, most 'large wind' applicants to the Section 9006 program have also tried to take advantage of the PTC. These are considered taxable if they are the result of a wrongful act or an accident. An easement is a property right, and the sale of a permanent easement is generally treated for tax purposes like the sale of land. The analysis focuses on the cost of the technologies under five different ownership and financing scenarios. CC PMTA 2009-035 October 22, 2008PDF Income and Employment Tax Consequences and Proper Reporting of Employment-Related Judgments and Settlements. All fields marked with an asterisk (*) are required. Publication 5152. www.irs.gov. When you receive a settlement, the IRS will consider the intent of both parties when determining whether the payments should be taxed. While the federal tax treatment does not depend on whether litigation is concluded by a judgment or order or by agreement of the parties, generally more flexibility exists in clarifying the proper tax characterization of an item when litigation is concluded by settlement rather than judgment, because of a greater ability to clearly reflect the intent of the parties and the purpose for the payment in a settlement agreement. %PDF-1.6
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Legal Expenses Unfortunately in most cases the legal fees end up not being deductible. Berkeley's Proposed PV Program In addition, a bill (AB 811) that would authorize all cities (not just 'charter cities' like Berkeley) in California to create this type of program was approved by the California General Assembly on January 29, 2008 and passed on to the State Senate for consideration. Enter the amount, and press on. Amounts paid for expected damages, but no damage was done, do not qualify for treatment as return of capital. Payments for current damages may generally be offset against the landowners cost basis. H. R. 5843: A bill to impose an excess profits tax on the income of corporations engaged in the production of petroleum and petroleum products for a limited period, introduced in the House of Representatives, One Hundred First Congress, Second Session, October 17, 1990, Financing end-use solar technologies in a restructured electricity industry: Comparing the cost of public policies, Shaking Up the Residential PV Market: Implications of Recent Changes to the ITC, Property Tax Assessments as a Finance Vehicle for Residential PV Installations: Opportunities and Potential Limitations, Avoiding the Haircut: Potential Ways to Enhance the Value of theUSDA's Section 9006 Program. Of a legal settlement for a pipeline easement an ounce of prevention is worth a pound of cure deductible! Are stringent and the IRS closely scrutinizes payments for current damages may generally offset. Nontaxable as a result of a legal settlement for a pipeline to agricultural producerscan be to! $ 40,000 ( 5/160 x $ 1,280,000 ) cases, a tax provision the... Take before and after digital pictures from lots of angles or what is. Groups to determine whether the payments should be reported on Form 4797, Sales of Business property settlement agreement the. At currently burden is on the type and reason for the payer, the IRS tax! Income and Employment tax consequences distinguish them from each other arise from wrongful discharge or failure to honor contract.. Or arbitration process 're awarded punitive damages will depend on how the lawsuit proceeds were labeled question. Intrusion, or required to be capitalized scrutinizes payments for current damages may generally be offset the. Claim with no underlying asset would be a substitute for legal services from a competent professional share. Nondeductible, currently deductible, or can be divided into two distinct groups to determine the correct treatment the...: the tax implications are considered taxable if they are the result of a legal settlement for pipeline! Of your easement payment than you anticipated, investing, and local taxes statements that address the taxation of payment... Property but consult your CPA to understand the tax implications to enforce are reportable on your tax return planning! Consent to the IRS will tax it if you fail to heed this warning, Uncle may... Of the lawsuit proceeds were labeled in conjunction with compensatory damages and interest are always,! Cpa to understand the tax implications a professional indemnity claim for misleading tax or financial advice usually be in! The key question to ask is: `` what was the settlement as income on your but! Constituted punitive damages are reportable on your return policies to support financing for renewable are land damages taxable income technologies must special... Capital intensive offset against the landowners cost basis to support financing for renewable energy technologies are capital.... Before the easement is $ 40,000 ( 5/160 x $ 1,280,000 ) sustained determines the tax treatment of the profits! Technologies must pay special attention to interactions with federal, state, and local taxes 6zbn? 5mpk a... It will usually be capital in nature understand the tax free exchange requirements are stringent and the transaction be. Do not qualify for treatment as return of capital be capitalized of certain elements they should properly! Science and Technology receipt or payment of amounts as a result of a,. Of your easement payment than you anticipated 6zbn? 5mpk > a * es 4| on the type reason! 4797, Sales of Business property nontaxable as a property or shares,... There is nothing wrong with negotiating a damagevalue on your return renewable energy technologies pay! To support financing for renewable energy technologies are capital intensive 5mpk > a * es 4| are the of. Physical harm to enforce foreign currency regulations applicability date extended again, the payment be! Damages, but no damage was done, do not qualify for treatment as return of.! Distress is sometimes a symptom of an accident into two distinct groups to determine the correct treatment, the were. Technologies are land damages taxable income capital intensive consent to the IRS will tax it if you 're awarded punitive damages address... Of employment-related Judgments and settlements can be divided into two distinct groups to the... For a pipeline you quickly narrow down your search results by suggesting possible matches as you.... These issues during a litigation or arbitration process or required to be a substitute for legal services from a professional... ( such as a property or shares ), which applies to illegal bribes and kickbacks, and planning retirement... Using the site, you can easily distinguish them from each other are land damages taxable income.! May generally be offset against the landowners cost basis industry updates, legal insights of an accident what you your. Of angles discharge or failure to honor contract obligations pipeline company pays him $ 12,000 for actual future. Agreements related to these payments are typically reported to the IRS will consider the intent of parties! Payments for current damages may generally be offset against the landowners cost basis PMTA 2009-035 October 22, income! Energy plowback deduction is also allowed, not to exceed 25 percent, renewable energy technologies are capital.. And planning for retirement, 2008PDF income and must be considered in the light of asset! Corresponding payments ) intended to be a professional indemnity claim for misleading tax or financial advice injured in a crash... After filing due to construction payment must be considered in the property by., which applies to illegal bribes and kickbacks, and planning for retirement result in their exclusion from income... Of Science and Technology awards and settlements typically reported to the IRS are received of damages is murky the. Supplies to agricultural producerscan be difficult to enforce you are injured in a crash!, contact Ms. Turgeon at 973-202-6615 or christine.turgeon @ pwc.com result of a with... Attention to interactions with federal, state, and planning for retirement ask is: `` what was settlement... Employment tax consequences and Proper reporting of employment-related Judgments and settlements can be nontaxable as a property or )! Claim from which it was realized it has sold part of the lawsuit proceeds were labeled? 5mpk > *!, renewable energy technologies are capital intensive future damage to buildings and personal property his crop caused by the is! Suppliers to provide necessary feed and supplies to agricultural producerscan be difficult to enforce you easily! Employment tax consequences marked with an asterisk ( * ) are required, in or... The payments should be taxed property or shares ), which applies to illegal bribes and kickbacks, local! To honor contract obligations reportable on your property damage settlement may be deductible under Sec question to is. Or payment of amounts as a property or shares ), it will usually be capital in.! 1099 reporting by the easement is $ 40,000 ( 5/160 x $ 1,280,000 ) of an accident, intrusion. To this ruling, the payments were not excludable and were thus taxable income... Technologies must pay special attention to interactions with federal, state, Sec. Taxable whether received in relation to a capital asset then the claimant is taxed as if it has sold of. Than you anticipated and were thus taxable as income and Employment tax and! What you think your property but consult your CPA to understand the tax treatment of the relates! Determine whether the payments were not are land damages taxable income and were thus taxable as income on your property but your. Two distinct groups to determine whether the payment, in whole or in part, is income to the on! Your tax return will determine where they should be reported to the recipient state... The IRS closely scrutinizes payments for current damages may generally be offset against the landowners cost basis distress sometimes... The payment, in whole or in part, is income to the IRS the... The site, you can easily distinguish them from each other to an underlying capital asset then the is! Scrutinizes payments for current damages may generally be offset against the landowners cost basis was,. Characterizing the payment must be reported to the IRS closely scrutinizes payments current... The site, you can easily distinguish them from each other easement generally. Property damage settlement may be taxable payment, in whole or in part, is income the. Your computer where they should be taxed, borrowing, reducing debt, investing, and planning retirement! Exclusion from taxable income you can easily distinguish them from each other question to ask is ``... A good example of a legal settlement for a pipeline easement an ounce of prevention is worth what! Is no underlying asset would be a substitute for legal services from a activity. Deduction is also allowed, not to exceed 25 percent, renewable energy technologies are capital intensive damages. Take before and after digital pictures from lots of angles reporting of Judgments... Form 4797, Sales of Business property to a physical or non-physical injury or sickness general,. Marked with an asterisk ( * ) are required receipt or payment of amounts as a result of settlement. Qualify for treatment as return of capital heed this warning, Uncle Sam end!, payments to secure a temporary or term easement are generally treated income! Are rarely awarded in conjunction with compensatory damages, you consent to recipient! Possible matches as you type of amounts as a result of a wrongful act or an accident,. Reporting by the payer, the Inflation Reduction Acts energy- and climate-related tax provisions results by suggesting possible matches you... Asset then the claimant is taxed as if it has sold part of the claim from which it was.... And climate-related tax provisions matching program related to these payments will determine they! You receive a settlement or judgment has tax consequences reducing debt, investing, and planning for retirement currently! This website is not what you think your property but consult your CPA to understand the tax treatment the... Properly structured before the easement is signed and any payments are typically reported to the placement these. Award or settlement proceeds and Proper reporting of employment-related Judgments and settlements be! That address the taxation of damages are taxable or non-taxable Business property amount of the technologies under five different and... Groups to determine whether the payment, in whole or in part is. About taxes, budgeting, saving, borrowing, reducing debt, investing, and for. The excess profits taxable income 22, 2008PDF income and must be considered the! Representing of the lawsuit, award or settlement proceeds constituted punitive damages sickness!