Our last post discussed the enhanced proof that plaintiffs must present to win a claim for retaliation. This post deals with the tax treatment of the award when plaintiffs win. The U.S. Tax Court recently decided the question in Green v. Commissioner of Internal Revenue.
The court began with the proposition that all income is considered to be taxable unless specifically excluded.
A legal award may be excluded from income if two conditions are met. A legal award may be excluded if the underlying cause of action is based upon tort or tort-type rights, and if the proceeds were for damages received on account of personal physical injury or physical sickness. Emotional distress is not a personal physical injury or physical sickness.
The first condition — vindication of tort-type rights — was met. The second — personal physical injury or sickness — was not. The court reviewed the jury award and found it to consist primarily of compensation for loss of earnings and loss of employment opportunities. A portion of the award was to compensate for non-economic injuries such as damage to reputation and emotional distress. There was no evidence of actual medical injury.
Thus, the court found that the entire award was subject to income tax.