Description
You are a staff accountant for a regional CPA firm, Earnest & Wilson, CPAs. Vera Simmons, a long-time client, calls you regarding an accident her husband was in early last year. Vera’s husband, Walter, was sitting in his car waiting for a red light to change when he was rear-ended by a drunk driver. He spent months in the hospital, has significant medical problems, and will require ongoing care and treatment. His attorney sued the drunk driver who, luckily, was insured. Walter and Vera are in negotiations in an attempt to settle the suit. You have spoken to her about the accident in the past, but this call is about a possible legal settlement for damages
The insurance company, Wayward Casualty, has offered $1.5 million allocated as follows:
Pain and Suffering $250,000
Lost Wages $200,000
Medical Costs (past & future) $650,000
Punitive Damages $400,000
Vera also explained they will receive interest from the date of the accident to the date of settlement at 7%.
Walter and Vera believe the settlement is reasonable. However, in order to make a decision, she would like to understand the tax consequences of the proposed settlement. She would like you to write a letter so they can review it in detail with the attorney.
Be sure to address each specific allocation item noting whether it is taxable or not. Also, address whether Vera can take a deduction for any medical costs that are reimbursed. Provide references and support for your conclusions.
Other Assignment Guidance
Address:
Mr. and Mrs. Walter Simmons
1900 Pennsylvania Avenue
San Diego, California 92101
Assume that your letter is written on the letterhead of your firm, Earnest & Wilson, CPAs
Use single-spaced, 1” margins, 12-point font in professional business letter format.
Unformatted Attachment Preview
Federal Tax Coordinator 2d ¶J-5801. Exclusion of income for damages received for
personal physical injury.
The amount of any damages (see text at footnote 2 et seq., below) received on account of personal
physical injuries or physical sickness is excluded from gross income.
1
The term “damages” means an amount received (other than workers’ compensation, see ¶ J-5816.1 ),
through prosecution of a legal suit or action, or through a settlement agreement entered into in lieu of
prosecution.
2
The exclusion applies whether the damages are received by suit or agreement.
3
The exclusion can apply to damages recovered for a physical injury or sickness under a statute, even if
that statute does not provide for a broad range of remedies, and even if the injury is not defined as a tort
4
under state or common law. Thus, damages awarded under no-fault statutes can be eligible for the
exclusion.
5
Damages can be excluded whether received as a lump sum or as periodic payments.
6
Damages, for purposes of the exclusion described above, do not include:
. . . punitive damages (see ¶ J-5815 );
7
. . . amounts received as workers’ compensation; or
8
. . . compensation for pain and suffering resulting from the consensual performance of a service
contract (in the case at issue, to undergo egg donation procedures).
8.1
However, if an action has its origin in a physical injury or physical sickness, then all damages (other than
punitive damages) that flow from that injury or sickness are treated as payments received on account of
physical injury or physical sickness.
9
RIA illustration 1: Damages (other than punitive damages) received by an individual on account
of a claim for loss of consortium due to the physical injury or physical sickness of that individual’s
spouse are excluded from gross income.
10
Damages received on account of personal nonphysical injuries or nonphysical sickness are not excluded
from gross income.
11
Thus, damages received based on a claim of employment discrimination, or injury to
reputation, are not excluded from gross income.
12
Emotional Distress.
Emotional distress is not considered a physical injury or physical sickness for purposes of the exclusion
from income of damages received on account of physical injury or physical sickness.
13
Thus, damages
received on account of emotional distress are not excluded from gross income under Code Sec. 104(a)(2)
(except as provided in the text at footnote 19, below).
14
RIA illustration 2: The exclusion from gross income for damages on account of injuries or
sickness does not apply to any damages received based on a claim of employment discrimination, or
injury to reputation, accompanied by a claim of emotional distress.
15
The term “emotional distress” includes physical symptoms (e.g., insomnia, headaches, stomach
disorders) that can result from the emotional distress.
16
Thus, depression, sleep disorders, or high blood
sugar caused by an individual’s stress from a wrongful termination were not considered personal physical
injury or physical sickness, and were not excluded from his gross income.
17
Similarly, emotional distress
damages for injury to human capital were damages received on account of personal nonphysical injuries
or nonphysical sickness, and not excluded from gross income.
18
However, damages for emotional distress are excluded from gross income to the extent the damages are
either:
(a) attributable to a physical injury or physical sickness; or
19
(b) not in excess of the amount paid for medical care (as described in Code Sec. 213(d)(1)(A) or
(B), see ¶ K-2100 ) and attributable to emotional distress.
20
In this context, the term “damages”
means an amount received (other than workers’ compensation) through prosecution of a legal suit
or action, or through a settlement agreement entered into in lieu of prosecution.
20.1
A settlement payment for illness and medical expenses was not excludable from gross income where a
taxpayer claimed that she suffered from emotional distress symptoms resulting from her depression that
were exacerbated by her wrongful termination. Here, the taxpayer failed to provide evidence that her
physical symptoms of depression were severe enough to rise to the level of a physical injury or physical
sickness.
20.2
Establishing the exclusion.
Whether damages are received on account of personal injury is determined by examining the substance of
the claim, the evidence and arguments presented,
21
and the intent of the payor.
22
RIA observation: Although Fono and Wade (footnotes 21 and 22, above) were decided before
the exclusion for personal injuries was restricted to physical injuries, it seems that the approach to
determining whether damages are for excludable injuries would remain the same.
When a settlement agreement clearly stated that sums paid were compensation for physical injuries and
damages, and/or emotional injuries and damages, the damages received were not excludable from gross
income.
23
Evidence revealing that an emotional distress settlement allocation was motivated, in part, to avoid tax
liability and was devoid of any causal physical injury link, led to the conclusion that the damages received
were not excludable from income.
24
For the effect of the nature of the claims presented on the allocation of lump-sum settlements, see
¶ J-5810 .
Reg § 1.401-1(c) discussed above (in the text at footnotes 3, 4, 8, and 19 through 20.1, above) applies to
damages paid pursuant to a written binding agreement, court decree, or mediation award entered into, or
issued after, Sept. 13, ’95, and received after Jan. 23, 2012. The taxpayers also can apply these regs to
damages under a written binding agreement, court decree, or mediation award entered into or issued after
Sept. 13, 1995, and received after Aug. 20, ’96. If applying these regs to damages received after Aug. 20,
’96, results in an overpayment of tax, the taxpayer can file a claim for refund before the expiration of the
period of limitations for refund claims under Code Sec. 6511 (see ¶ T-7501 et seq.). To qualify for a refund
of tax on damages paid after August 20, ’96, under a written binding agreement, court decree, or mediation
award entered into or issued after Sept. 13, 1995, a taxpayer must satisfy the requirements of §1605 of the
Small Business Job Protection Act of 1996, (SBJPA, PL 104-188).
25
RIA observation: SBJPA §1605 generally amended Code Sec. 104 by repealing the exclusion for
punitive damages and for damages not attributable to physical injuries or physical sickness.
In reversing a district court decision, the Ninth Circuit held (in an unpublished opinion) that if the district
court were to determine that a certain percentage of settlement proceeds had been paid on account of
physical injury, that percentage would apply to the entire settlement, including the amount retained by the
attorney. The Ninth Circuit also said that the district court had erred by failing to consider whether the
taxpayer would be entitled to any deductions for her attorney’s fees and litigation costs relating to the
underlying state court settlement, which may have reduced her overall tax burden for the tax year at issue.
As IRS conceded, any taxable component of the award would generate a (potential) deduction for the
corresponding portion of the attorney’s fee.
25.5
Tax-free recoveries for personal injuries have included damages for:
. . . death of naval officer killed as the result of incident involving the U.S.S. Liberty on June 8, ’67,
received by widow.
26
. . . payments to Vietnam veterans or survivors of deceased veterans from the Agent Orange
Settlement Fund, since the payments are made due to sickness or disability resulting from
exposure by the Vietnam veterans to agent orange during their tours of duty in Vietnam.
27
. . . genuine injuries sustained by the taxpayer/president (who, together with his wife, were the
corporation’s controlling shareholders) in the course of his employment. IRS unsuccessfully argued
that the payment was in part compensation for personal services and in part a dividend. While
acknowledging that the parties did not deal at arm’s length, the court found that both the taxpayer
and the corporation sought the advice of independent counsel, and that they relied on the advice in
good faith.
28
. . . an ex-employee’s settlement payment for allegations that work-related stress exacerbated a
physical condition.
29
. . . compensatory damages paid to a taxpayer received to settle tort claims where the
circumstances, including a substantial passage of time since the alleged tort and the fact that the
taxpayer was a minor at that time, rendered it reasonable for IRS to presume that the compensation
was for the taxpayer’s personal physical injuries, and that all damages for emotional distress were
attributable to the physical injuries.
30
. . . compensatory damages received by an exonerated prisoner under state legislation enacted to
compensate wrongfully incarcerated individuals for their physical injuries, sickness, and economic
losses flowing from their injuries and sickness.
31
RIA caution: Chief Counsel Advice 201045023
(above) was issued before the enactment of Code Sec. 139F (see ¶ J-5850 et seq.) which excludes
from gross income amounts received for wrongful incarceration. The exclusion under Code Sec. 139F
isn’t limited to physical injuries, sickness, and economic losses flowing from injury and sickness.
. . . one-half of an ex-employee’s settlement payment where, notwithstanding that the underlying
claim was based on the tort of intentional infliction of emotional distress, his physical injuries were
the overriding focus of his complaint and figured prominently among the damages for which the
settlement payment was made.
32
. . . a 10% portion of a payment received in settlement of a workers’ compensation claim where the
taxpayer showed that the 10% portion was attributable to the taxpayer’s personal physical injury,
even though the payment was not excludable under Code Sec. 104(a)(1) for failing to satisfy the
requirement that it be “received under a workers’ compensation act ( ¶ H-1351 and ¶ H-1352 ).
32.1
. . . physical injury or smoke inhalation suffered by victims in an incident that was settled by a joint
prosecution agreement.
32.2
The exclusion from income for damages received on account of physical injuries or physical sickness
(footnote 1, above) applies to awards, whether received as a lump sum or periodic payments, under § 406
of the Air Transportation Safety and System Stabilization Act (ATS Act) of compensation to any individual
physically injured and to the personal representative of any individual killed as a result of the
terrorist-related airline crashes of Sept. 11, 2001, as well as to successor beneficiaries of claimants who
die before the entire amount of the reward is paid out.
33
The following amounts were NOT tax-free recoveries for personal injuries:
. . . $70,000 in damages awarded by the Equal Employment Opportunity Commission (EEOC) to a
postal worker. The EEOC’s decision stated clearly that the damages were for emotional distress
attributable to discrimination on the job.
33.3
. . . a payment from a state’s worker’s compensation plan that was made pursuant to a domestic
relations order to the ex-spouse of a state employee who was disabled on the job. Neither the Code
nor the regs provide an exclusion from income for amounts paid to former spouses pursuant to a
domestic relations order.
33.5
. . . wages awarded the taxpayer by a jury for his claim that his employer discriminated against him
under the Americans With Disabilities Act (ADA) by failing to make a workplace accommodation for
him for personal injuries he sustained on the job. Although the taxpayer’s claim would not have
arisen “but for” the injuries, the court stated that the taxpayer’s attempt to turn “what was clearly just
an ADA action into…a personal physical injury claim is a bit of a stretch, to say the least.”
34
. . . payment received to settle a wrongful dismissal suit where the taxpayer lost her job after a
difficult pregnancy. The taxpayer argued that the payment was for physical injuries sustained
during the pregnancy, but there was no reference to injury or sickness in the settlement agreement.
35
. . . payment received to settle the taxpayer’s claims against her insurance company for false sales
practices, where the complaint contained no particularized allegations regarding personal injury,
and merely mentioned emotional harm. The release did not allocate any amount to personal injury,
and the insurance company’s fear of punitive damages motivated it to settle.
36
. . . payment received to settle the taxpayer’s employment discrimination claim. The agreement
stated that the payment was for the taxpayer’s resignation and dropping of all civil rights claims.
The standard form filed by the taxpayer to resign was attached to the agreement, and stated she
was resigning for medical reasons. However, there was no reference to, or mention of, this in the
agreement, and the taxpayer was separately pursuing a worker’s compensation claim on these
issues. Thus, the court held the settlement payment was not compensation for physical injuries or
sickness.
37
. . . payment received to settle the taxpayer’s sexual harassment claim in which she sued for mental
anguish and humiliation. The court stated that the payment was in part for emotional distress, but
the taxpayer failed to establish a physical element to the injury.
38
. . . payment to an employee under a settlement agreement that stated that the employer-bank had
entered the agreement “for the exclusive purpose of avoiding the expense and inconvenience of
further litigation.” The employee, who complained of stress and anxiety after losing his position for
reporting an alleged violation of the Sarbanes-Oxley Act, had sued under the whistleblower
provision of that Act.
38.1
. . . payment received to settle a variety of commercial claims, e.g., for fraud, where the taxpayer
failed to show a link between the losses for which he was compensated and any personal injuries or
illness suffered around the same time.
39
. . . payment received to settle a lawsuit brought for wrongful discharge, intimidation, coercion, and
harassment under a state workmen’s compensation statute. Under Reg § 1.104-1(c) (footnote 3,
above), the term “damages received” includes amounts received other than workmen’s
compensation. Since the petitioner’s settlement was not for other than workmen’s compensation,
the settlement was not excludable from gross income.
40
. . . payment that was for “exemplary damages,” defined as an example to others and as a penalty
or by way of punishment, was deemed to represent punitive damages, and was not excludable
from gross income.
41
. . . payment received to settle a lawsuit filed in state court by a professor against the university that
had employed him, seeking damages for age discrimination, invasion of privacy, defamation,
intentional infliction of emotional distress, and loss of consortium. The evidence of the payor’s intent
for making the payment indicated that the university intended to buy out the professor’s tenured
contract and did not intend to compensate him or his spouse for their personal injuries or for
abandoning their tort claims.
42
. . . payment received to settle an age discrimination lawsuit. The evidence of the payor’s intent
indicated that no part of the settlement paid to the employee was compensation for physical injury
or physical sickness, and the employee made no allegation that the damages were paid for medical
care.
43
. . . payment received to settle an age discrimination lawsuit. The settlement agreement did not
apportion any part of the settlement proceeds to physical injury or physical sickness.
44
. . . payment received to settle an age discrimination lawsuit where the employer treated the
payment as wages subject to withholding.
44.1
. . . payment received to settle a sexual harassment/discrimination law suit against an employer.
The employee did not allege physical injury or sickness in his complaint, but the settlement
agreement was broad and encompassed all possible causes of action, including physical injuries.
However, there was no allocation of a specific amount of the settlement as compensation for
physical injuries or physical sickness. Accordingly, without the allocation, no amount of the
settlement proceeds was excludable from income.
45
. . . payment received to settle a racial discrimination and unlawful retaliation law suit against an
ex-employer where (1) the complaint placed little emphasis on the employee’s physical sickness,
(2) settlement agreement did not allocate any amounts specifically to physical injuries or sickness,
and (3) the employer did not intend for the payments to be in satisfaction of the employee’s claims
of physical sickness. Thus, the employee failed to prove that any portion of the payment received
under the settlement agreement was to compensate him for physical sickness, and was not
excludable as damages for physical injuries or sickness.
45.1
. . . payment received to settle a lawsuit filed in federal court by a secretary against her employer
who had refused to act on complaints of racially offensive jokes and slurs at work, and had
attempted to discourage any complaints of discrimination. The settlement agreement stated that
the payment was intended as compensation for emotional distress. Thus, the payment was not
excludable as damages for physical injuries or sickness even if the taxpayer experienced
headaches, insomnia, and stomach disorders, since Congress intended that these physical
symptoms be treated as emotional distress (see discussion at footnote 19, above).
46
. . . payment received in settlement of gender-based discrimination and unlawful retaliation against
an ex-employer, where express language in the settlement agreement stated that the payment was
to be paid as damages for emotional distress due to depression. Accordingly, the payment not
being attributable to physical injury or sickness, but to a nonphysical injury (namely, claims of
suffering gender-based discrimination and unlawful retaliation with respect to employment), was
not excludable from income.
47
. . . payment received in settlement of discrimination and wrongful termination claims against an
ex-employer, where the settlement agreement expressly attributed the payment to emotional
distress and mental suffering. Thus, the payment was not excludable as damages for physical
injuries or sickness.
48
. . . payment received in settlement of a sexual harassment lawsuit by a financial analyst against
her ex-employer, where express language in the settlement agreement stated that the payment
was for damages on account of her emotional distress and not as a result of a physical injury or
physical sickness. Thus, the payment was not excludable from the taxpayer’s income as damages
for physical injuries or sickness.
49
. . . payment received in settlement of various employment related claims by a professor against a
university, where the settlement agreement expressly stated that the university would pay the
settlement proceeds for emotional distress damages only. Thus, the payment was not excludable
as damages for physical injuries.
49.1
. . . payment received to settle a lawsuit filed in federal court by a school superintendent against the
school district and school board members who had prematurely terminated his employment
contract. Because the taxpayer had requested compensatory and punitive damages, the court held
that he had sought damages for economic injury, rather than personal injury. Thus the payment
was not excludable as damages for personal injury or sickness.
50
. . . payment received in settlement of a lawsuit filed by an employee alleging various forms of
employment-related claims against the employer, including allegations of “financial loss, and
mental and physical pain and suffering.” The settlement agreement referred to wages, penalties,
and attorney’s fees, but not to any personal injuries or sickness suffered by the employee. The
court held that the employee sought damages based solely on economic injury, rather than
personal injury.
1
. . . payment received in settlement of a lawsuit filed by employee an alleging various forms of
employment-related claims against the employer, including allegations of sex discrimination and
retaliation. The taxpayer claimed that she was exposed to pesticides during her work, and suffered
both physical injuries, including respiratory damage and headaches, and emotional distress,
including mental trauma and memory loss. However, her complaint did not allege that emotional
distress arose from physical injuries, but alleged that emotional distress, anxiety and stress arose
from other grounds in the complaint (e.g., emotional distress attributable to unlawful employment
discrimination based on sex). The settlement agreement expressly allocated the damages paid as
compensation for emotional distress damages only and for attorneys’ fees. There was also was no
evidence that the taxpayer had incurred any expenses in the tax year at issue for medical care
attributable to her emotional distress. Thus, there was no basis for the taxpayer to exclude any
portion of the payment as damages for personal injury or sickness.
2
. . . payment received in settlement of a class action lawsuit filed by U.S. Air Force Officers,
including the taxpayer, who was a member of the class. The complaint had alleged violation of
equal-protection rights by the U.S. Air Force. The settlement agreement stipulated that the
lump-sum payment the taxpayer received was not compensation for physical injuries or physical
sickness. Thus, he could not exclude the payment as damages for personal injury or sickness.
3
. . . payment received to settle a class action brought by employees and former employees against
an employer to recover overtime compensation and liquidated damages under the applicable labor
law. The taxpayer claimed that his excessive work load had caused physical and mental injuries,
but did not bring this claim to the attention of the employer or its attorneys in connection with the
class action. However, even though the settlement agreement provided that “all settlement
proceeds are paid to plaintiffs on account of personal injuries,” this language was held to be
inconsistent with the other provisions of the agreement that clearly indicated that the settlement
was intended to satisfy the claims for back pay and other damages made in the class action.
4
. . . mediation payments received to settle an employer’s violation of Michigan’s “whistleblower”
provision for damages allegedly suffered by an employee where the employee did not (1) incur any
medical expenses, (2) consult with a medical professional, or (3) inform his employer of any
physical injury or sickness.
5
. . . payment received to settle an employer’s violation of Texas’ “whistleblower” provision. The
settlement agreement, rendered in conjunction with a jury verdict, referred to “additional damages”
but did not allocate any of the payment to personal injury or sickness. The Tax Court concluded that
the payments were intended as a substitute for punitive damages and interest, but labeled
otherwise for public policy reasons.
6
. . . payment received to settle a landlord’s retaliatory eviction against a tenant. The complaint
requested damages attributable to economic loss as well as physical and emotional injuries. The
jury’s award, however, divided the damages only by the designations “actual” and “non-economic.”
The Tax Court concluded that given the manner in which the jury award was allocated, the actual
damages portion obviously related to financial or economic losses the taxpayer had suffered as a
result of the retaliatory eviction, and so were not excludable from the taxpayer’s income.
6.1
. . . payment received to settle a lawsuit against Santa Clara county, in which the complaint alleged
(1) violation of California’s “whistleblower” provision, (2) infliction of emotional distress, and (3)
defamation. The settlement agreement defined a very general reference to the taxpayer’s claims
against the county and did not allocate between tort or tortlike claims. Further, the taxpayer failed to
demonstrate that the payment she received from the county was on account of personal physical
injuries or physical sickness. The Tax Court held that, absent proof of a specific payment for tortlike
personal physical injuries or physical sickness, no portion of the settlement proceeds was
excludable from the taxpayer’s income.
7
. . . payment received to settle a lawsuit in which the initial complaint to recover compensation
under a contract to perform scientific research as an independent contractor was later amended to
add a claim for damages to the taxpayer’s health. The settlement agreement referred to the
taxpayer’s claims for emotional distress and personal injury, but did not specifically allocate any of
the payment towards settlement of these claims. Even though the personal injury claim was added
at the suggestion of the state court trial judge to expedite settlement, the Tax Court characterized
the references to personal injuries in the settlement documents as tax-motivated language that did
not reflect the economic realities of the settlement.
8
. . . payment received to settle a sex discrimination and harassment claim against an employer. The
settlement agreement did not allocate any part of the settlement payment to personal physical
injury or sickness. Even though the taxpayer testified that the employer’s actions had aggravated a
pre-existing medical condition, there was no corroborating evidence that the taxpayer’s maladies
constituted a physical injury or physical sickness caused by the employer’s conduct.
9
. . . payment that was part of a severance package received in exchange for the release by the
taxpayer of all claims against his employer, including claims of personal injury. The taxpayer
claimed that part of the payment was excludable from income because the only actual or potential
claim he had against the employer was for a personal physical injury (carpal tunnel syndrome).
However, the release did not allocate portions of the payment among the large number of claims
being released. Also, the taxpayer’s signing of a standardized release form used in the termination
of a number of employees indicated that the payment was not on account of personal injuries.
10
. . . payment received in settlement of an employee’s lawsuit against an employer alleging violation
of state law through the use of video and audio surveillance at the workplace, invasion of privacy,
and intentional infliction of emotional distress. The payor’s intent in making the payment could not
be determined from the settlement agreement, which did not allocate the award to any specific
types of damages. Also, the taxpayer conceded in the pre-trial stipulation of facts that no portion of
the settlement proceeds was paid on account of personal physical injuries or physical sickness.
11
. . . payment received to settle a sex discrimination and racial harassment claim against an
employer. The intent of the payor in making the payment could not be determined by the settlement
agreement, which released all claims against the employer and did not mention physical injury or
sickness. Also, there was no evidence linking the settlement proceeds to physical injury or sickness
sustained by the employee.
12
. . . payment received to settle the taxpayer’s suit against Universal Studios for racial harassment
and discrimination. No physical injury was involved.
13
. . . payment received to settle the taxpayer’s “reverse discrimination” claim against the State of
California. The taxpayer was denied a civil service position under an affirmative action program,
despite scoring higher on a merit-based exam than individuals who were hired. Payments the
taxpayer received were not excludable from income, since no physical injury was involved in the
claim.
14
. . . payment received to settle the taxpayer’s discriminatory hiring practices claim against the City
of Chicago, for having violated a prior consent decree and engaging in politically discriminatory
hiring practices. Here, the taxpayer alleged that she had submitted various job applications to the
City of Chicago, but her applications were not given fair consideration. However, she made no
allegation that she had received the payments on account of physical injuries or physical sickness.
Further, there was nothing in the record that suggested that her damages for the City of Chicago’s
discriminatory hiring practices had any physical component.
14.1
. . . payment of $2 million the taxpayer received to settle a contract dispute. The taxpayer’s claim of
tortious interference with contracts related to economic injury, not physical injury. The taxpayer
presented evidence that he suffered hypertension as a result of the dispute, a symptom that could
lead to heart attack, stroke, etc. But the court noted that hypertension itself is a symptom of
emotional distress, payments for which are generally not excludable. The physical illnesses to
which the hypertension could lead did not form the basis of the taxpayer’s claim. (The taxpayer
based his claim on the contract issues and not the health-related issues.) Thus, even if he suffered
physical injuries (which he didn’t), the settlement payment could not have related to them.
15
. . . payment to the taxpayer from a written contract to participate in a gout study. Here, the taxpayer
had been suffering from gout, entered into a written contract to participate in the gout study, but he
did not allege that he suffered from any physical injury or sickness on account of the gout study.
Further, taxpayer did not prove a direct causal link between the payment he received, and the gout
that he has suffered from since 1983. Moreover, the taxpayer testified that he had the contract, but
failed to produce it at trial. Without this contract, the Tax Court could not determine that the
payment was compensation for anything except the taxpayer’s mere participation in the study
15.1
. . . payment received to settle a sexual harassment claim against an employer. The taxpayer
claimed that she had suffered various economic injuries because her employer intimidated her and
the company failed to offer her another job. An arbitrator found no economic injuries, but made an
award to the taxpayer based on noneconomic harm arising from her harassment suit. The taxpayer
contended that under Michigan law, the arbitrator was prohibited from awarding compensation for
emotional distress. Thus, the amount awarded to her must have been for physical harm. The Tax
Court disagreed. In reaching its decision, the court found that the taxpayer’s original claim (1) never
asserted any physical injury or sickness that had resulted from the actions of her supervisor, and
(2) there was no evidence establishing that the taxpayer’s claim against her employer was for, or
that the arbitrator’s award was made on account of, personal physical injuries or physical sickness.
16
. . . payment received to settle disability discrimination and retaliation claims against an employer.
The taxpayer claimed that his former employer had wrongfully failed to accommodate his disability
and, thus, had violated family and medical leave rules. But, the taxpayer’s complaint didn’t mention
physical injury. Nor had the taxpayer sought damages on account of personal physical injuries or
physical sickness. Further, an arbitrator did not particularize the award for any of the taxpayer’s
claims and did not talk about any physical injury, except tangentially mentioning a prior condition
already cured, but made the award to the taxpayer on account of the former employer’s family and
medical leave breaches. Yet, the taxpayer contended that his claim (and the arbitration award)
related to his physical injury, since the claim required wrongful retaliation against a physically
injured employee while on disability leave. The Tax Court disagreed. In reaching its decision, the
court found that the taxpayer had failed to show that either the arbitrator or his former employer had
intended that any of the award was to recompense the taxpayer for his former employer causing or
exacerbating any personal physical injury or physical sickness suffered by him.
16.1
. . . payment received to settle the taxpayer’s wrongful termination suit against his employer. The
taxpayer contended that he suffered phy
