Standard Federal Tax Reporter (2007), .04, Compensation for Injuries or Sickness: Damages for Physical Personal Injuries or Sickness: Damages for physical personal injuries or sickness
Click to open document in a browser The amount of any damages received on account of physical personal injuries or sickness are excludable from gross income (Code Sec. 104(a)(2)). The word "damages" includes not only amounts awarded by a court in a lawsuit; it also includes amounts received as the result of an agreement in settlement of a suit (Code Sec. 104(a)(2)). This exclusion is subject to the exception for previously reimbursed medical expenses (¶6662.021). The exclusion is not available in the case of damages awarded to a corporation, because a corporation cannot sustain "personal" injuries (P & X Markets, Inc., 106 TC 441, Dec. 51,400. Aff'd, CA-9 (unpublished opinion), 98-2 USTC ¶50,613; ¶6662.523). Damages ...view middle of the document...
Damages for emotional distress (including the physical symptoms of emotional distress) may not be treated as damages on account of a personal physical injury or sickness, except to the extent of an amount paid for medical care attributable to emotional distress. However, damages for emotional distress and other nonphysical injuries or sickness remain excludable to the extent attributable to a physical injury or sickness (Code Sec. 104(a)). Under the former version of the statute, as in effect before Aug. 21, 1996, back pay received to satisfy an employment discrimination claim was not excludable; however, damages received for emotional distress were excludable because they were received on account of personal injuries or sickness (Rev. Rul. 96-65, 1996-2 CB 6, at ¶6662.528). EXAMPLE Mike and Sherry Evans are in a traffic accident in which their car is struck from behind. Mike's injuries incapacitate him for many months. They successfully pursue a legal claim and Mike recovers damages for his physical injuries, medical costs, emotional distress, and loss of consortium with Sherry. Because the emotional distress damages awarded to Mike were on account of his physical injuries, all of the damage awards are excludable from income (see Code Sec. 104(a); ¶6660.137). Act Sec. 1529 of the Taxpayer Relief Act of 1997 (P.L. 105-34) contains special rules which treat disability payments received in 1989, 1990, and 1991 by certain police and firemen suffering from heart disease or hypertension as excludable under Code Sec. 104(a)(1). For the specific requirements to qualify under this section, see the amendment notes in the Code Volumes. Where a taxpayer has received a damage award or settlement for nonphysical injuries or emotional distress, attorney's fees paid in the form of contingency fees are also not excludable from the income of the damaged party. The Supreme Court has held that contingency fees are includable in the taxpayer's income if the award amount is also included in the taxpayer's income. (J.W. Banks,SCt, 2005-1 USTC ¶50,155, at ¶6662.515)
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