DC Court Backs Off Decision that Personal Injury Awards are Not Taxable
Back in August, we reported on a DC Circuit Court decision that determined that non-economic damage awards in personal injury cases were not "income" for federal income tax purposes. Now, in an unusual move, the same court has scheduled the matter for oral arguments this spring and invited briefs on the issue.
Until 1996, the Internal Revenue Code itself made it clear that awards in personal injury cases were intended to "make the plaintiff whole", and as such were not "income". However, a 1996 amendment limited the exclusion to awards stemming from physical illness or injury. The change apparently shifted a wide range of awards in civil cases--awards for damages such as loss of reputation and enjoyment of life--into the taxable column.
The DC Court's initial ruling relied upon the definition of "income" as "gain" to determine that any award intended only to restore the plaintiff to his or her previous position could not be considered income. As such, no compensatory award would be subject to taxation as income.
Now, with the Court's strange and apparently unprovoked order, the question is once more open. The New York Personal Injury Law Blog has a nice overview of the progress of this case with links to some more extensive writings on the issue and the text of the court's most recent (and largely unenlightening) order.