Your client, Teddy Chow and his wife Abby, filed a lawsuit to recover damages for personal injuries Teddy sustained in a 2000 auto accident. In 2004, a jury awarded Teddy $1,620,000 in damages. In addition, delay damages in the amount of $1,080,000 were then added to that award, resulting in a total judgment of

$2,700,000. The defendants appealed the award, and while the appeal was pending, the parties reached a settlement, which provided for payment to Teddy of $2,550,000. In 2009, after attorney’s fees of $850,000 were subtracted, Teddy received $1,700,000. Teddy wants to know how these amounts are treated for tax purposes.

After appropriate research, write a letter to Teddy and Abby explaining your findings. Their address is 654 Hops Street, Golden, CO 78501.