From its infancy, the Internal Revenue Code has contained an exclusion from taxable income for damages received on account of personal injuries. For decades, courts have worked at deciphering its meaning, dealing with issues such as what constitutes a personal injury, whether there should be a distinction between physical and non-physical personal injuries, and whether punitive damages were also excluded. The last decade has largely focused on the taxability of awards under federal statutes prohibiting discrimination, specifically Title VII of the Civil Rights Act of 1964(1) and the Age Discrimination in Employment Act (ADEA),(2) as well as the taxability of punitive damages.
In its 1992 decision, United States v. Burke,(3) the United States Supreme Court held Title VII damages taxable. The Court determined that because of its limited remedies available to successful plaintiffs the statute did not redress a tort or tort-type injury.(4) In 1991, however, in a change not addressed in Burke, Congress amended Title VII to provide a more expansive list of remedies and remediable injuries.(5)
In the midst of lower court struggles with the Burke legacy, the Supreme Court added to the confusion by its reasoning in a 1995 ADEA case.(6) Holding both the backpay and the liquidated damage components of the award taxable, the Court rather unpersuasively opined that the ADEA redressed neither tort or tort-type rights nor a personal injury.(7) It further held that, contrary to Burke, these were separate tests ("based upon tort or tort type rights" and "received on account of personal injuries or sickness"), that ADEA's liquidated damages were punitive in nature, and that the ADEA's more generous (than Title VII) remedies were not extensive enough to meet Burke's requirements for excludability.(8) The better reasoned dissent of Justices O'Connor, Souter, and Thomas took serious issue with the majority's revisionist reading of Burke. As part of the background to the recent developments, the Scheiler case will be discussed.
Another contentious issue over the last decade has been the taxability of punitive damages. A 1989 congressional attempt at resolution of the issue was leas than successful. That legislation made punitives paid for nonphysical injuries taxable.(9) In the latter half of 1996, however, the Supreme Court(10) and Congress(11) seemed to have taken the requisite definitive steps to making all these awards taxable. Importantly, the congressional Act amending Internal Revenue Code [sections] 102(a)(2) generally made damages paid for nonphysical personal injuries taxable.(12) A review of the O'Gilvie v. United States(13) decision and the new legislation highlight the resolved and remaining unresolved areas.
Yet another high visibility area within [sections] 104(a)(2) involves settlement agreement allocations between taxable and nontaxable components. Frequently, parties enter such agreements without tax forethought. After signing off on a general release they are forced to argue allocation issues in hindsight. Alternatively, the agreement may contain an allocation which the Internal Revenue Service challenges. The issue in these cases is the enforceability of the designated allocation. Recent cases on these points will be discussed.
Often linked to the allocation issue is the issue of the taxability of statutory pre-judgment interest. Two courts of appeals have dealt with the question, both finding it taxable, although the First Circuit clearly has left the door open to revisit the issue. These cases will likewise be explored.
After explicating these issues, the Article analyzes the state of the law and makes several recommendations. Future problem areas are mentioned, as well as some suggestions for a plaintiff's tax or litigation counsel. A short concluding section ends the Article.
I. The Scope of [sections] 104(a)(2)
Prior to August 21, 1996, [sections] 104(a)(2) provided:
(a) In General. Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include --
(2) the amount of any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or sickness;(14) The section limits the exclusion of damages to natural persons.(15) The amount of damages received are excluded from gross income whether the award results from a final judgment or from a compromise settlement.(16) The language had been interpreted to include damages from all personal injuries without distinguishing between physical and non-physical injuries.(17) As the statutory text indicates, the exclusion is also applicable whether payment is made in a lump sum or over a period of time.(18) Significant changes made to this section in 1996 will be discussed later in this Article.(19) Those changes narrowed the scope of the exclusion.
II. United States v. Burke
In 1992, the United States Supreme Court in United States v. Burke held that an award of backpay damages for sex discrimination pursuant to Title VII of the Civil Rights Act of 1964 was not excludable.(20) The Court reasoned that Title VII, prior to its amendment in 1991, did not redress a tort or tort-type injury because its limited remedies of backpay, injunction, and equitable relief were inconsistent with traditional tort-type remedies such as compensatory damages for pain, suffering, emotional distress, injury to reputation, and consequential and punitive damages.(21) Two Tax Court memorandum decisions, rendered post-Burke and filed before the 1991 amendment, held that Title VII amounts awarded for racial discrimination were includable in income.(22) The Burke holding, however, is now quite limited. Congress amended Title VII in 1991(23) to provide a broader range of remedies but then eviscerated the tax effect of the expanded remedies with the Small Business Job Protection Act of 1996,(24) discussed below.(25)
III. Commissioner v. Schleier(26)
The first relevant United States Supreme Court decision after Burke came in June 1995 in Commissioner v. Schleier. The six to three decision involved a claimed exclusion of the settlement proceeds of an Age Discrimination in Employment Act (ADEA)(27) claim. The majority held both the backpay and liquidated damage components taxable, reversing the Tax Court(28) and Fifth Circuit determinations.(29) Because it is one of only two post-Burke Supreme Court decisions on the taxability of damages, it is worthy of some discussion.
Justice Stevens' opinion favoring taxability rested on two primary arguments: (1) an ADEA claim is not based on tort or tort-type rights, and (2) the ADEA damages were not received on account of personal injuries or sickness, both required by [sections] 104(a)(2) according to the opinion.(30) With respect to the personal injury question, the majority found that neither the backpay nor the liquidated damage amounts were paid on account of personal injuries.(31) The backpay portion, according to the majority, was not based upon any personal injury the complainant may have suffered.(32) Further, the items that were tied to backpay (being laid off on account of age) were not of a personal injury type.(33) Apparently, the Court thought the conclusion self-evident because it offered nothing in support. The liquidated damage portion was likewise not paid on account of a personal injury because it was punitive, not compensatory, in nature.(34)
The taxpayer then sought to exclude the settlement proceeds on the basis of the regulation which states that excludable damages are those received by suit or settlement based on tort or tort-type claims.(35) The Court rejected that proposition on two grounds: to be excludable the damages must nevertheless be on account of a personal injury or sickness, an argument the Court had just rejected; and ADEA awards were not based on tort or tort-type rights.(36)
To sustain the first point, the Court relied on the Commissioner's current, but admittedly inconsistent, reading of her own regulation.(37) Conceding that the Commissioner had read the regulation previously as though the tort requirement encapsulated the personal injury requirement, Justice Stevens conveniently found that the current reading was correct and more faithful to the statutory language.(38) In other words, the regulation was now being read to require that payment be made on account of a personal injury or sickness and for a tort or tort-like claim -- separate and independent standards.(39) As discussed above, the Court rejected the proposition that ADEA damages were paid on account of personal injuries. Failure to satisfy that standard was alone fatal to excludability.
The majority also rejected the taxpayer's assertion that Burke required exclusion of the ADEA settlement proceeds.(40) While conceding that Schleier was a closer case than Burke, the Court determined that ADEA remedies were still not sufficiently broad to make ADEA claims tort or tort-like per the Burke analysis.(41) Although the availability of jury trials and punitive damages under the ADEA were among the missing tort-like remedies mentioned in Burke, they were found insufficient to change the result.(42) Like Title VII remedies, ADEA remedies lacked compensation for "pain and suffering, emotional distress, harm to reputation, or other consequential damages.'"(43) The Court also reiterated that Burke's analysis did not eliminate the "on account of personal injuries or sickness" requirement of the statute.(44) Thus, even if the Court had found ADEA claims to be tort or tort-like under Burke, the taxpayer would still have failed the "on account of" a personal injury test.
Justice O'Connor, joined by Justices Thomas and Souter, filed a better reasoned dissent. O'Connor began with a refutation of the majority's primary holding -- she unequivocally asserted, "[a]ge discrimination inflicts a personal injury."(45) buttress her assertion, she pointed to the Threlkeld Tax Court test of a personal injury as an "invasion of the rights ... granted by virtue of being a person in the sight of the law."(46) O'Connor noted the Third, Sixth, and Ninth Circuits had utilized the test in holding ADEA damages excludable.(47) She also maintained that all the Justices in Burke except Scalia subscribed to the view that discrimination was a personal injury.(48)
The second front of O'Connor's attack focused on her reading of Burke. She rejected the majority's claim that the ADEA did not address a tort or tort-type right. Pointing out the broader remedies available under the ADEA that were not available under Title VII before it was amended in 1991, she asserted that "an ADEA suit [qualifies] as a `tort type' action under Burke."(49) The dissent also disputed the majority's claim that Burke did not conclusively determine that any tort claim was within [sections] 104(a)(2).(50) According to O'Connor, "[e]very Member of the Court so understood the [Burke] opinion -- that the scope of [sections] 104(a)(2) is defined in terms of traditional tort principles."(51) The dissent closed by criticizing the Court's and the Commissioner's jettisoning of thirty-five years of regulatory interpretation by holding that the requirements of payment on account of a personal injury and involvement of a tort or tort-type right were separate and independent inquires.(52)
At least one salutary effect of the Schleier decision was that it resolved a significant conflict in the courts of appeals. Previously, the Third,(53) Sixth,(54) and Ninth(55) Circuits had held ADEA damages excludable. Only the Seventh Circuit had predicted the Supreme Court outcome.(56) Trial courts were likewise split.(57)
IV. Post-Schleier Developments
A. The Allocation Problem
Several cases have dealt with the issue of allocating damage awards between taxable and nontaxable components or determining the taxability of a settlement payment. This section will review many of these cases arising after Schleier.(58)
The day after the Schleier decision, the Tax Court, in a memorandum decision, found that a taxpayer had not met her burden of proving that a settlement with her former employer was, in whole or in part, payment for a tort-like sex discrimination claim." Thus, the entire payment was held taxable. The settlement and release made no reference to the taxpayer's sex discrimination claim and the payor had withheld taxes and shown payment on a W-2.(60) The payor/employer obviously thought its payment was a common severance payment and the release was a general one.(61)
Six weeks later, in another memorandum decision, the Tax Court dealt with a similar situation with a similar result.(62) The taxpayer had alleged that an employment related settlement agreement had compensated him for damages to his health and reputation, mental anguish, fraud, and misrepresentation.(63) The court, however, determined that no such allegations had been made in the taxpayer's original complaint and that the reference to 'alleged fraud' in the release was insufficient to find payment on account of a personal injury.(64) The other evidence (primarily the complaint and some related correspondence) clearly indicated that the taxpayer's claims were based on breach of contract.(65)
A federal district court in Oklahoma decided a case the next day involving both the taxability of punitive damages arising from a claim of bad faith failure to pay benefits and an allocation issue.(66) The taxpayer asserted that the entire settlement payment was excludable because all payments were made on account of a judgment against an insurance company for bad faith, a personal injury.(67) The government argued that the entire amount was taxable since no allocation had been made in the settlement agreement. Alternatively, the government asserted that at the least the taxpayer had the burden of proving the exclusion.(68)
The court resolved these issues by dividing the settlement amount into three components based on the trial court award: breach of contract damages for failure of the insurance company to pay an uninsured/underinsured motorist claim, tortious bad faith compensatory damages, and punitive damages.(69) The breach of contract damages were held excludable as amounts paid from insurance for personal injuries.(70) The bad faith award was likewise excluded as a payment on account of personal injury as determined under state law.(71) Finally, the Court held the punitive damage component taxable because under Oklahoma law punitive damages were intended as punishment, not compensation to the victim.(72) Thus, based on the Schleier analysis, the punitive damages were not paid on account of a personal injury or sickness."(73)
The Tax Court addressed the allocation problem again in September 1995 with what was becoming a predictable result for the taxpayer. In Taylor v. Commissioner,(74) the taxpayer alleged race and sex discrimination in a complaint filed with the Equal Employment Opportunity Commission (EEOC), a charge that was dismissed.(75) 15 A subsequent suit against her former employer (AT&T) and union charged breach of contract and breach of duty of fair representation.(76) The Tax Court took pains to point out that at no point did the taxpayer allege personal injury or claim tort-like damages.(77) A settlement agreement between the parties contained a general release and an agreement not to sue.(78)
Once again, the settlement agreement did not address the issue of what specific claims were being settled so the court looked to the intent of the payor.(79) Relying on Schleier, the court found neither prong of the Schleier test satisfied, i.e., the taxpayer had neither asserted a tort or tort-type right nor alleged a personal injury.(80) Importantly, her discrimination claims were made prior to the 1991 amendments to Title VII.(81) Furthermore, the court stated that even if it had determined that the taxpayer had made claims of the requisite nature, there was no evidence that AT&T's payment was made on account of those claims.(82) The failure of the taxpayer to specify the claims settled was fatal to the exclusion of the settlement amount.(83)
The Fifth Circuit, in early December 1995, affirmed a Tax Court decision which ignored an extremely favorable (to the taxpayer) settlement agreement allocation and reallocated the proceeds.(84) The taxpayer had allocated 95% of the settlement to mental anguish and 5% to lost profits.(85) The defendant in the underlying suit was indifferent to the allocation but it had been 'approved' by the trial judge.(86) The Tax Court and Fifth Circuit held it permissible for the IRS to change the allocation to 16% mental anguish, 61% lost profit, 21% punitive damages, and 2% to other business damages because the original allocation had not been the product of a "bona fide adversary proceeding."(87) The figures were based on the jury award because the case had been settled while on appeal.(88) This decision clearly indicates that even when settlement agreements contain an allocation, courts may not be obligated to abide by them.
In a regular decision in mid-December of 1995 the Tax Court dealt at length with an allocation issue in a case where, again, the taxpayer believed the tax issue had been addressed in the settlement agreement.(89) The agreement clearly specified that payment was being made for damages for personal injuries such as defamation, invasion of privacy, and emotional distress.(90) The court set aside the language of the agreement, however, claiming that the trial court judgment, upheld in part on appeal, contained a punitive damage award which should have been part of the settlement agreement.(91) The fact that the agreement did not specifically address punitive damages and that the parties "jointly participat[ed]" in the drafting of the agreement purportedly allowed the court to rewrite the settlement agreement.(92) The court downplayed the fact that the defendant in the underlying suit had stated that it wanted the agreement to reflect nothing being paid for punitives, which should have created a measure of the "adversariness" mentioned in Robinson.(93) Of greater importance to the Bagley court were: (1) the lack of specific mention of punitive damages in the agreement; (2) that the defendant was allegedly more concerned that it "pay as little as possible' (what defendant is not?); and (3) that some punitive damages were likely in a retrial.(94) The Tax Court ultimately found one-third of the settlement amount to be for punitive damages.'5 In the remainder of the decision the court considered the taxability of the punitive damage portion, concluding that Schleier mandated their inclusion.(96)
Several memorandum decisions in 1996 and early 1997 continued the string of taxpayer losses in allocation cases due to an initial failure to make an allocation in the settlement agreement, and then failing to carry the burden of proving that the payor's intent was to make a payment on account of a personal injury based on tort or tort-like rights.(97) During this period, the Ninth Circuit also decided against a taxpayer in an allocation case for the same reasons.(98) It appears that in these cases, the taxpayers were not considering the tax aspects of their settlement when negotiating them with the notable exception of the Robinson and Bagley cases) and were forced to argue the tax issues after the fact, a significantly weaker position from which to argue. The taxpayer's task is often made more difficult because the releases are broad, general statements intended to cover any conceivable grounds for legal action. All the cases were founded in employment situations, which heightened the likelihood that the claims were based in contract, not tort.(99) The Tax Court has been unwilling to allocate a portion of the settlement payments to excludable personal injury damages simply based on general release language. Robinson and Bagley, in fact, demonstrate a willingness on a court's part to examine seemingly arm's length, good faith settlement allocations where the court sees a different underlying reality.(100)
Settlement agreement allocation problems have also arisen in the context of the taxability of statutory prejudgment interest. That topic is the subject of the next section.
B. Statutory Prejudgment Interest
In 1996, two circuit courts addressed the issue of the taxability of prejudgment interest which was statutorily attached to otherwise clearly nontaxable damage awards.(101) In apparent conflict are two provisions of the Internal Revenue Code. As has been discussed, [subsection] 104(a)(2) excluded from taxable income amounts paid on account of personal injury or sickness.(102) In contrast, SS 61(a)(4) specifically mentions interest as a type of income includable in a taxpayer's gross income.(103)
The first of the two decisions, Brabson v. United States,(104) tackles the issue more squarely and thoroughly and, hence, more convincingly. The Brabsons were awarded damages and prejudgment interest for injuries caused by a gas leak at their home.(105) The Tenth Circuit used the case to examine and evaluate a consistent line of Tax Court cases holding such interest taxable, beginning with Kovacs v. Commissioner.(106) Using the two prong Schleier test as a guide, the court first found the interest was related to an underlying tort claim and then turned to Colorado law to determine if the interest component was paid on account of a personal injury.(107) That analysis disclosed that state law categorized prejudgment interest as a type of compensatory damage for the time value of money.(108) In evaluating whether SS 104(a)(2) contemplated excluding this type of compensatory damage, the court found little help from the statutory language or legislative history.(109) Somewhat stymied, the court fell back on history prejudgment interest was not common in tort cases at the time SS 104(a)(2)'s predecessor was enacted), the lack of a direct connection between the injury and the damages (interest is time driven more than injury driven), and that exclusions from income should be construed narrowly, to find the interest taxable.(110) In short, the court was unwilling to give the taxpayers the broader reading of [subsection] 104(a)(2) that they advocated.(111)
Delaney v. Commissioner(112) was primarily about the Tax Court's failure to honor the allocations contained in a settlement agreement.(113) The case also touched on the taxability of prejudgment interest, but the First Circuit did not squarely address or decide that issue because of some procedural failings of the taxpayers.(114)
On the settlement agreement front, the circuit court found that the Tax Court was correct to look at evidence outside the settlement agreement and stipulation of dismissal to ascertain what claims the parties were actually settling.(115) In the underlying case the taxpayers had obtained a $175,000 personal injury judgment to which $112,000 of prejudgment interest was automatically added by state law.(116) The parties settled for a total of $250,000.(117) While the agreement was silent about interest (a general release), the stipulation of dismissal said, "No interest. No Costs.'"(118) The IRS and Tax Court determined that 39% ($112,000/$287,000) of the settlement amount, or $97,561, was prejudgment interest.(119) Unfortunately, while approving the Tax Court's consultation of sources outside the agreement and stipulation, the First Circuit only mentioned two sources, neither of which indicates much of anything-plaintiff's trial counsel testimony that taxes were not considered in the agreement, and the factual statement made in a letter by that counsel to the defendants that interest was accruing on the judgment (which would, of course, be postjudgment interest).(120) The court may simply have felt the IRS allocation not unreasonable under the circumstances and that the taxpayers had not met their burden of proving it erroneous.
The second argument made by the taxpayers, like the taxpayers in Brabson, was that prejudgment interest is excludable as damages paid on account of personal injuries.(121) After refusing to let the taxpayers argue that Kovacs was a fundamentally flawed decision,(122) the court, examining Rhode Island state law, found that the interest was not a part of personal injury damages.(123) The court then suggested that the interest would nevertheless be excludable if it satisfied Schleier's two prong test.(124) Clearly, the underlying cause of action involved a tort claim (a fall off a second story condominium porch).(125) The court, however, did not let the taxpayers address the second (personal injury) prong because they failed to make the argument in the Tax Court.(126) Thus, the issue could not be raised for the first time on appeal. The court ominously concluded, "we do not consider whether statutory prejudgment interest may ever be excludable from gross income...."(127)
V. PUNITIVE DAMAGES
With the United States Supreme Court decision in O'Gilvie v. United States on December 10, 1996, the taxability of punitive damages now appears to be the most settled component of [subsection] 104(a)(2).(128) The 1989 legislation made punitive damages taxable if they were based on a non-physical injury.(129) The Small Business Job Protection Act of 1996, discussed below,(130) made all punitive damages taxable. The O'Gilvie decision confirmed that even punitive damages paid for a physical injury prior to 1989 are taxable. In short, punitive damages have been taxable all along.(131)
The six to three decision (Scalia, O'Connor, and Thomas dissenting), handed down only two months after oral argument, is fairly straightforward. Justice Breyer, writing for the majority, basically relied on a common sense reading of [subsection] 104(a)(2). According to the majority, the section excludes payments which are intended to compensate victims for loss, i.e., the Court recognized the historical restoration of human capital" argument.(132) Punitive damages, in contrast, are intended to punish and deter, not compensate. Thus, punitive damages are not paid "on account of" the personal injury, but on account of the defendant's particularly bad behavior.(133) For Breyer, the issue was virtually decided in Schleier in favor of taxability.(134)
Perhaps the taxpayers' strongest argument was that the 1989 amendment that made punitives taxable if related to a nonphysical injury by implication made those related to a physical injury nontaxable. That argument was disposed of by the dubious assertion that "the view of a later Congress cannot control the interpretation of an earlier enacted statute."(135) Certainly such a view can provide a court with insight into Congress's understanding of a statute's meaning and, hence, what Congress was trying to accomplish in an amendment to the statute. Paradoxically, Breyer was not above referring to the Small Business Job Protection Act's taxation of most punitive damage awards to support his position, though he admitted neither party had argued its relevance.(136)
Scalia, in dissent, took an equally straightforward, textualist approach.(137) The crux of his argument was that since the punitive damages would not have been paid "but for" the personal injury, punitive damages were, ipso facto, paid "on account of" the personal injury and, hence, were within the ambit of [sections] 104(a)(2).(138) Scalia buttressed his argument with a structural analysis of sections 104(a)(1) and 104(a)(2). Section 104(a)(1) excludes worker's compensation payments received "as compensation for" personal injuries, while [sections] 104(a)(2) excludes payments received "on account of" personal injuries or sickness.(139) He opined that if Congress had meant only to exclude compensatory amounts, it could have utilized the [sections] 102(a)(1) language.(140) By not doing so, he reasoned, Congress intended a more inclusive result. Scalia also quarreled with Breyer's use of Schleier (an opinion in which Scalia joined the majority), but felt it largely irrelevant in light of his view that the statutory language clearly dictated exclusion.(141)
The Supreme Court's decision was consistent with courts of appeals' decisions from the Fourth,(142) Fifth,(143) Ninth(144) and Federal Circuits.(145) Only the Sixth Circuit had found punitive damages excludable.(146)
VI. The Small Business Job Protection Act of 1996
It fell to the productive 104th Congress to take some determined steps toward cleaning up the morass that [sections] 104(a)(2) had become. The changes made by the statute are effective as to amounts received after the date of enactment (August 20, 1996) unless paid pursuant to a binding agreement, court decree, or mediation award made on or before September 13, 1995.(147)
The legislation amends [sections] 104(a)(2) by specifying that the exclusion from taxability provided by [sections] 104(a) does not apply to punitive damages.(148) This provision eliminates the current physical/nonphysical distinction to punitive damages taxability and generally makes all punitive damages taxable. However, in a new subsection (c), punitive damages are said not to include wrongful death damages where state law provides only for punitive damages in such cases, thus treating such amounts as tax-free.(149)
Another major amendment to [sections] 104 specifies that only damages paid on account of physical injuries or sickness are excludable from income.(150) Damages for emotional distress, to the extent they exceed the medical care costs for emotional distress, are specifically said to be nonphysical in nature and, hence, taxable.(151) The Conference Report makes clear that emotional distress damages paid as a result of an underlying physical injury or sickness will still be excludable from income.(152) In contrast, emotional distress damages paid for an employment discrimination claim, for example, would be taxed because the underlying claim was for a nonphysical injury.(153) This provision will perpetuate, albeit in a slightly different context, the need to distinguish between physical and non-physical injuries. Not entirely clear from the statutory language, however, is the tax status of an award of emotional distress damages for a physical injury where the damages recipient was not the one physically injured, e.g., a negligent infliction of emotional distress or a loss of consortium claim. It might seem that the statutory language and intent would be to tax such amounts. However, the House Ways and Means Committee Report explicitly states otherwise. "If an action has its origin in a physical injury or physical sickness, then all damages (other than punitive damages) that flow therefrom are treated as payments received on account of physical injury or physical sickness whether or not the recipient of the damages is the injured party."(154) This issue may be the subject of future litigation if not the subject of a technical correction.
This legislation is a leap in the right direction as far as punitive damages are concerned. It also forms a desirable symmetry with the O'Gilvie decision which postdated it by several months. It is more consistent with the policy and history of [sections] 104 and eliminates the meaningless distinction between physical and nonphysical injuries with respect to punitives. Unfortunately, that meaningless distinction has been retained for compensatory damages. Further, because emotional distress damages are presumably paid as compensation for emotional injuries it is legitimate to question, in light of the policy and history of [sections] 104, why any emotional distress damages should be taxable.
Analysis and Recommendations
As mentioned in the previous section, the punitive damages area of personal injury award taxability is now the most settled. Basically, punitives are and have been taxable as a result of a combination of legislative enactment and Supreme Court decision. Despite Justice Scalia's doggedly textualist approach, taxing punitives seems the correct result given the policy underlying [sections] 104(a)(2). Punitives are designed to punish and deter wrongful conduct, not compensate or "make whole" the injured party. In fact, to the injured party, punitives represent a windfall. Rightly, they should be taxed.
Likewise, statutory prejudgment interest should be subject to tax, although that issue is less clear and less clearly determined. While such interest is compensatory in the sense that it compensates an injured party for the value of lost money, it is inconsistent to allow its receipt to be tax free when interest earned outside this context is taxable. All interest by its nature and definition is compensatory. Allowing its tax-free receipt when related to a personal injury claim furthers no sensible substantive or policy goal. Absent congressional clarification of the issue, the interest should be taxed if for no other reason than the settled interpretive policy of construing exclusions from income narrowly.(155)
The issues relating to settlement agreement allocations remain the thorniest for taxpayers. In the absence of an allocation, courts have shown a willingness to either create their own allocations or, in the worst case, allocate all of a settlement amount to taxable claims on the ground that the taxpayer has not met his burden of proving the excludable portion. Of even greater concern to litigants and their advisors is the fact that courts have also shown a willingness to examine allocations made by the parties and, just as willingly, adjust those allocations. Robinson seemed to merely require a degree of adversariness between the parties with respect to the allocation.(156) Bagley, the Tax Court decision, and Delaney in the First Circuit, arguably went further and allowed a court to reallocate based on its own notions of the underlying reality.(157) The best that a plaintiff's tax counsel can advise is to be careful about claims made in a complaint (including punitive damage claims), make clear and document the claims being settled, including any negotiations affecting settlement value related to tax considerations, and to be realistic in the ultimate allocation. Care must be taken in the complaint, lest a court make an allocation based on what was asserted there. Unrealistic allocations will likely be set aside and one cannot be certain where a court may come down once it has decided to reallocate. General, blanket releases should be avoided; or, alternatively, after allocations are made to specific claims, some allocation should be made to "any and all other claims."(158)
A recent article in Lawyers Weekly USA(159) discussed still other issues facing taxpayer litigants. Among those not previously discussed are the taxability of attorney fees which may be paid or awarded (taxable but deductible as a miscellaneous itemized deduction), state tax status (almost all states will follow the federal lead), and what constitutes a physical injury (sex harassment? civil rights? legal malpractice?).(160) The physical injury issue is particularly nettlesome and will likely spur a new round of litigation testing the limits of the designation. Plaintiff taxpayers will no doubt probe to see how attenuated and insubstantial courts will permit the physical injury to be and still give rise to an excludable award. As indicated earlier, this issue is particularly regrettable because of the meaninglessness of the distinction. It seems the preferred course would have been to leave the inquiry at the two prong Schleier test instead of complicating matters by, at least in some cases, having to determine if the personal injury was physical or nonphysical.
Another welcomed statutory amendment would have been to tax any wage component of an award or settlement. Fairness and consistency dictate such a result -- the wages would have been taxable had the injury not occurred. No meaningful policy reason suggests why they should be treated differently when paid as part of a personal injury case. In fact, logically, the wages are being paid on account of the plaintiffs employment, not on account of her personal injury. To avoid a "bunching" of wage income problems in a lump sum settlement or award, special income averaging rules could be utilized. Truth be told, no plaintiff could legitimately object to the simple fairness of such a change.
The roughly two years since the Supreme Court decision in Schleier have been event-filled. As lower courts struggled with that decision, the Supreme Court and Congress clarified the issue of punitive damage taxability and circumscribed the excludability of other personal injury payments, albeit less clearly. Most punitive damage payments will now be taxed. Uncertainty still exists regarding the taxability of statutory pre-judgment interest and the enforceability of settlement agreement allocations, as well as how courts will treat unallocated settlement amounts. While Congress will now only exclude personal injury damages for physical injuries or sickness, the physical/nonphysical distinction remains problematic. Several specific problem areas have been identified. While some areas of [sections] 104(a)(2) may now be more settled, there remain more than enough issues to keep tax and litigation counsel occupied.
(*) Associate Professor, Department of Legal Studies, Bowling Green State University.
(1) 42 U.S.C. [subsection] 1971, 1975a-d, 2000a-h (1994 & Supp. I 1995).
(2) 29 U.S.C. [subsection] 621-634 (1994).
(3) 504 U.S. 229 (1992).
(4) See id. at 238.
(5) See Civil Rights Act of 1991, Pub. L. No. 102-166, [sections] 102, 105 Stat. 1071, 1072 (codified as amended at 42 U.S.C. [sections] 1981a (1994)).
(6) See Commissioner V. Schleier, 515 U.S. 323 (1995).
(7) See id. at 334.
(8) See id. at 332-37.
(9) See Omnibus Budget Reconciliation Act of 1989, Pub. L. No. 101-239, [sections] 7641, 103 Stat. 2106, 2379; see also infra note 131 and accompanying text (citing O'Gilvie's interpretation of Congress's intent with respect to the 1989 legislation).
(10) See O'Gilvie v. United States, 117 S. Ct. 452 (1996).
(11) See Small Business Job Protection Act of 1996, Pub. L. No. 104-188, [sections] 1605, 110 Stat. 1755, 1838 (to be codified at 26 U.S.C. [sections] 104(a)).
(12) See id. [sections] 1605(a), 110 Stat. at 1838.
(13) 117 S. Ct. 452 (1996).
(14) I.R.C. [sections] 104(aX2) (1994).
(15) See P & X Markets, Inc. v. Commissioner, 106 T.C. 441, 444 (1996); Boyett Coffee Co. v. United States, 775 F. Supp. 1001, 1003-04 (W.D. Tex. 1991).
(16) See I.R.C. [sections] 104(a)(2) (1994), amended by Pub. L. No. 104-188, [sections] 1605, 110 Stat. 1755, 1838 (1996); Treas. Reg. [sections] 1.104-1(c) (as amended in 1970).
(17) See United States v. Burke, 504 U.S. 229, 235 n.6 (1992). But see infra notes 146-53 and accompanying text (discussing the Small Business Job Protection Act of 1996).
(18) See I.R.C. [sections] 104(a)(2) (1994). Although a periodic payment contains an imputed interest component, that component has not been subject to tax. See Rev. Rul. 79-220, 1979-2 C.B. 74.
(19) See infra notes 147-54 & accompanying text.
(20) See Burke, 504 U.S. at 229.
(21) See id. at 238-41.
(22) See Harris v. Commissioner, 64 T.C.M. (CCH) 518 (1992); Fogle v. Commissioner, 64 T.C.M. (CCH) 242 (1992). Prior to Burke, the United States Court of Appeals for the District of Columbia also held that Title VII awards for racial discrimination were not excludable under [sections] 104(a)(2). See Sparrow v. Commissioner, 949 F.2d 434, 438 (D.C. Cir. 1991); accord, Watkins v. United States, 650 P.2d 286 unpublished table decision), 80-1 U.S. Tax Cas. (CCH) [para] 9362 (Ct. Cl. Apr. 11, 1980). Conversely, the Tax Court in pre-Burke, pre-amendment decisions assumed that racial discrimination awards were excludable personal injury damages by relying on the Sixth Circuit's decision in Burke. See Stocks v. Commissioner, 98 T.C. 1, 9 (1992) (citing Burke v. United States, 929 F.2d 1119 (6th Cir. 1991), rev'd, 504 U.S. 229 1992)); see also Downey v. Commissioner, 97 T.C. 150, 159 (1991), rev'd, 33 F.3d 836 (7th Cir. 1994); Metzger v. Commissioner, 88 T.C. 834, 846-47 (1987), aff'd without published opinion, 845 F.2d 1013 (3d Cir. 1988).
(23) See Civil Rights Act of 1991, Pub. L. No. 102-166, 105 Stat. 1071 (codified at 42 U.S.C. [sections] 1981a (1994)). Under section 102 of the Act, a plaintiff may recover compensatory and punitive damages in cases of intentional discrimination, including compensatory damages for emotional pain and suffering and mental anguish. These damages are capped between $50,000 and $300,000, depending on the size of the employer. A complainant or respondent may also demand a jury trial. See id. [sections] 102, 105 Stat. at 1072-73. The amendments were effective November 21, 1991. See id. [sections] 402(a), 105 Stat. at 1099. In Revenue Ruling 93-88, the Service confirmed that amounts received as damages on account of disparate treatment gender discrimination under Title VII, as amended in 1991, and amounts received under the Americans with Disabilities Act were all excludable from income under [sections] 104(a)(2). Backpay awarded for disparate impact gender discrimination continued to be taxable under the Ruling. See Rev. Rul 93-88, 1993-2 C.B. 61. However, in 1995, the Service suspended Revenue Ruling 93-88 in light of the Supreme Court decision in Commissioner v. Schleier. See I.R.S. Notice 95-45, 1995-2 C.B. 330. Finally, in Revenue Ruling 96-65, the Service determined Revenue Ruling 93-88 obsolete, Notice 95-45 superseded, and ruled all backpay and emotional distress damages under Title VII taxable, except emotional distress damages under [sections] 104(a)(2) received prior to its 1996 amendment. See Rev. Rul. 96-65, 1996-53 I.R.B. 5.
(24) Pub. L. No. 104-188, 110 Stat. 1755 (1996).
(25) See infra notes 147-54 and accompanying text.
(26) 515 U.S. 323 (1995).
(27) 29 U.S.C. [subsection] 621-634 (1994).
(28) See Schleier v. Commissioner, No. 22909-90, 1993 WL 767976 (T.C. July 7, 1993).
(29) See Schleier v. Commissioner, 26 F.3d 1119 (5th Cir. 1994).
(30) See Schleier, 515 U.S. at 329-37 (rejecting the taxpayer's arguments based upon the statute, the regulation, and the Burke case, on the grounds of one or both of these primary arguments).
(31) See id. at 330-31.
(32) See id. at 330.
(33) See id. (stating in conclusory fashion, "neither the birthday nor the discharge can fairly be described as a `personal injury' or `sickness.'").
(34) See id at 330-32. The Court relied heavily on its decision in Trans World Airlines, Inc. v. Thurston, 469 U.S. 111 (1985), for this position. The majority contended that arguments that liquidated damages, in part, were compensatory were raised and rejected in Thurston. See Schleier, 515 U.S. at 331-32 & n.5. Of primary importance to that determination was the fact that liquidated damages were only available in cases of willful misconduct by the employer. As will be discussed later in this section, this conclusion regarding liquidated damages was less obvious to some other courts.
(35) See id. at 333 (citing Treas. Reg. [sections] 1.104-1(c) (as amended in 1970)).
(36) See id. at 334-37.
(37) See id. at 333-34 & n.7 (recognizing that the Commissioner's past position was different from her current position, but noting that the latter was "correct").
(38) See id.
(39) The Fifth Circuit later described the two tests as follows: the personal injury requirement tested whether the damages were paid due to a personal injury as opposed to an economic loss while the tort or tort-like claim requirement tested the legal basis of the claim for tort-like characteristics, primarily looking at the scope of remedies available. See Dotson v. United States, 87 F.3d 682, 685 5th Cir. 1996).
(40) See Schleier, 515 U.S. at 334-36.
(41) See id. at 335-36.
(42) See id.
(43) Id. (quoting United States v. Burke, 504 U.S. 229, 239 (1992)).
(44) Id. at 336.
(45) Id. at 337 O'Connor, J., dissenting).
(46) Id. at 338 (quoting Threlkeld v. Commissioner, 87 T.C. 1294, 1299 (1986), affd, 848 F.2d 81 (6th Cir. 1988)).
(47) See id. at 339 (citing Redfield v. Insurance Co. of N. Am., 940 F.2d 542 (9th Cir. 1991); Pistillo v. Commissioner, 912 F.2d 145 (6th Cir. 1990); Rickel v. Commissioner, 900 F.2d 655 (3d Cir. 1990)).
(48) See id. at 340-41.
(49) Id. at 343.
(50) See id. at 344.
(51) See id.
(52) See id. at 344-45.
(53) See, eg., Rickel v. Commissioner, 900 F.2d 655 (3d Cir. 1990).
(54) See, eg., Pistillo v. Commissioner, 912 F.2d 145 (6th Cir. 1990).
(55) See, eg., Schmitz v. Commissioner, 34 F.3d 790 (9th Cir. 1994), vacated, 515 U.S. 1139 (1995) (remanding the case for reconsideration in light of Schleier); Redfield v. Insurance Co. of N. Am., 940 F.2d 542 9th Cir. 1991).
(56) See Downey v. Commissioner, 33 F.3d 836 (7th Cir. 1994) (holding ADEA settlement payments did not fall within any recognized statutory exclusion from income), cert. denied, 115 S. Ct. 2576 (1995).
(57) See Bennett v. United States, 30 Fed. Cl. 396 (1994) (holding ADEA awards excludable), rev'd, 60 F.3d 843 (unpublished table decision), 95-2 U.S. Tax Cas. (CCH) [para] 50,245 (Fed. Cir. July 10, 1995); Rice v. United States, 834 F. Supp. 1241, 1245 (E.D. Cal. 1993) (holding ADEA awards excludable), aff'd, 35 F.3d 571 (9th Cir. 1994), vacated sub nom., Commissioner v. Schmitz, 515 U.S. 1139 (1995) (remanding the case for further consideration in light of Schleier); Maleszewski v. United States, 827 F. Supp. 1553 (N.D. Fla. 1993) (holding ADEA awards includable). The Tax Court did not get it right either. See Renner v. Commissioner, 67 T.C.M. (CCH) 3072, (1994) (excluding ADEA awards); Cassino v. Commissioner, 67 T.C.M. (CCH) 2193 (1994) (same); Fite v. Commissioner, 66 T.C.M. (CCH) 1588 (1993) (same), rev'd in part, 79 F.3d 1148 (unpublished table decision), 96-1 U.S. Tax Cas. (CCH) [para] 50,159 (6th Cir. Dec. 26, 1996).
(58) Several of the cases discussed would now be moot in light of the Small Business Job Protection Act of 1996 provisions discussed later (see infra notes 147-54 and accompanying text), i.e., the claims which formed the basis for excluding some or all the settlement are now taxable in their entirety.
(59) See Britell v. Commissioner, 69 T.C.M. (CCH) 2904, 2908 (1995).
(60) See id at 2907.
(61) See id.
(62) See Osborne v. Commissioner, 70 T.C.M. (CCH) 247 (1995), aff'd, 114 F.3d 1188 (6th Cir. 1997).
(63) See id. at 251.
(64) See id.
(65) See id.
(66) See Lane v. United States, 902 F. Supp. 1439 (W.D. Okla. 1995).
(67) See id. at 1440.
(68) See id.
(69) See id. at 1442-43.
(70) See id. at 1443 citing 26 U.S.C. SS 104(aX3)).
(71) See id. at 1443 & n.4 (holding recovery excludable under [subsection] 104(a) (2) because Oklahoma law gave the plaintiff a cause of action sounding in tort for bad faith on the part of an insurance company in delaying or refusing to pay a claim).
(72) See id. at 1443-44.
(73) See id
(74) 70 T.C.M. (CCH) 729 (1995).
(75) See id. at 729-30.
(76) See id at 730.
(77) See id. at 730-31.
(78) See id. at 730.
(79) See id. at 732.
(80) See id. at 732-33.
(81) See id. at 730 (noting that the discrimination charge was filed in November 1990); cf supra notes 3-4 and accompanying text (discussing Burke and the limited remedies available under Title VII prior to the amendment).
(82) See id. at 733.
(83) See id. at 733-34.
(84) See Robinson v. Commissioner, 70 F.3d 34 (5th Cir. 1995), cert. denied, 117 S. Ct. 83 (1996). For a detailed discussion of the Tax Court decision see Brent B. Nicholson & Douglas F- Chapman, Enforceability ofSettlement Agreement Allocations Under Section 104(a)(2) of the Internal Revenue Code, 47 BAYLOR L. Rev. 97 (1995).
(85) See Robinson, 70 F.3d at 36.
(86) See id. at 37.
(87) Id. at 36-37.
(88) See id. at 36.
(89) See Bagley v. Commissioner, 105 T.C. 396 (1995), aff'd, 121 F.3d 393 (8th Cir. 1997).
(90) See id. at 403.
(91) See id. at 410.
(92) See id at 407-08 (distinguishing the present case from one in which the parties' allocation was binding for tax purposes).
(93) See id. at 408-09.
(94) See id. at 409.
(95) See id. at 410.
(96) See id. at 417-18.
(97) See Rutt-Hahn v. Commissioner, 72 T.C.M. (CCH) 1443 (1996); Sodoma v. Commissioner, 71 T.C.M. (CCH) 3178 (1996); Webb v. Commissioner, 71 T.C.M. (CCH) 2004 (1996); Foster v. Commissioner, 71 T.C.M. (CCH) 1865 (1996). In one case, however, the taxpayer was successful in arguing that one-half of settlement proceeds for a wrongful termination suit were for mental distress and hence, excludable. See Barnes v. Commissioner, 73 T.C.M. (CCH) 1754 (1997). The governing Oklahoma law treated such cases as tort cases. The court allocated the other half to punitive damages which it held includable because they were not compensatory in nature according to the state law. See id.
(98) See Strong v. Commissioner, 79 F.3d 1154 (unpublished table decision) 96-1 U.S. Tax Cas. [paragraph] 50,223 (9th Cir. Mar. 19, 1996). In this brief opinion, the Ninth Circuit court held that the taxpayer had failed to meet his burden of proving that the portion of his settlement was based in a personal injury claim, though the court conceded one of his two claims (a [subsection] 1981 racial discrimination claim) was such a claim. The court then refused to make an allocation of its own and held the entire amount taxable. See id.
(99) Typical of such cases is Simko v. Commissioner, 73 T.C.M. (CCH) 1679 (1997).
(100) The First Circuit also subscribed to this view in Delaney v. Commissioner, discussed infra notes 112-27.
(101) Under the law of both states involved, the award of prejudgment interest was statutorily mandated. See Brabson v. United States, 73 F.3d 1040 (10th Cir. 1996), cert. denied, 117 S. Ct. 607 (1996); Delaney v. Commisioner, 99 F.3d 20 (1st Cir. 1996).
(102) See supra notes 14-18 and accompanying text. The Small Business Job Protection Act of 1996 limited the exclusion of amounts paid for personal injury to personal physical injury. See infra notes 146-53 and accompanying text.
(103) See I.R.C. SS 61(aX4) (1994).
(104) 73 F.3d 1040 (10th Cir. 1996).
(105) See id. at 1041.
(106) 100T. c. 124 (1993), aff'd without published opinion, 25 F.3d 1048 (6th Cir.), cert. denied, 513 U.S. 963 (1994). See also Burns v. Commissioner, 67 T.C.M. (CCH) 3116, 3118 (1994) (holding prejudgment interest not excludable as damages for personal injuries); James v. Commissioner, 94 T.C. 189, 193 (1990) (same).
(107) See Brabson, 73 F.3d at 1043-44.
(108) See id. at 1044.
(109) See id at 1044-45.
(110) See id. at 1046-47.
(111) See id. at 1047.
(112) 99 F.3d 20 (1st Cir. 1996).
(113) See id. at 22.
(114) See id at 27.
(115) See id. at 24.
(116) See id. at 22.
(117) See id.
(119) See id.
(120) See id at 25.
(121) See id. at 26.
(122) The court declined to address the taxpayers' argument that Kovacs was "unsound" because of the precedents upon which it relied) because they made the argument for the first time on appeal. See id.
(123) See id.
(124) See id. at 27.
(125) See id.
(126) See id.
(127) Id.' In an unpublished opinion, the First Circuit decided a similar case with the same result a few weeks after Delaney. See Forest v. Commissioner, 104 F.3d 348 (unpublished table decision), 97-1 U.S. Tax Cas. (CCH) 150,118 (1st Cir. Dec. 18,1996). Forest was also a Rhode Island case butinvolved a lump sum product liability settlement with no allocation. Hence, the court said the taxpayer had failed to establish that the award did not contain statutory prejudgment interest. As in Delaney the court refused to let the taxpayer argue the second prong of Schleier, i.e., that the prejudgment interest was received on account of her personal injuries. Thus, despite these two cases, the issue of the taxability of statutory prejudgment interest remains unresolved in the First Circuit.
(128) See O'Gilvie v. United States, 117 S. Ct. 452 (1996).
(129) See Omnibus Budget Reconciliation Act of 1989, Pub. L. No. 101-239, [subsection] 7641, 103 Stat. 2106, 2379 (1989) prior to 1996 amendment).
(130) See infra notes 147-54 and accompanying text.
(131) See O'Gilvie, 117 S. Ct. at 457-58 (holding punitive damages taxable for a physical injury occurring in 1983, and interpreting the 1989 amendment).
Congress might simply have thought that the then-current law about the provision's treatment of punitive damages-in cases of physical and nonphysical injuries-was unclear, that it wanted to clarify the matter in respect to nonphysical injuuries, but it wanted to leave the law where it found it in respect to physical injuries. Id at 457.
(132) See id. at 455-56. The most commonly accepted rationale for SS 104(a)(2)'s exclusion is that it recognizes that compensatory damages in personal injury cases are supposed to restore plaintiffs to the position they were in prior to the injury, i.e., make them whole for their loss. What is theoretically lost in personal injury cases is human capital.' See id at 455. The argument was made and accepted early in the Code's history based on decisions and an attorney general opinion. See Lynch v. Hornby, 247 U.S. 339 (1918); Southern Pac. Co. v. Lowe, 247 U.S. 330 (1918); Lynch v. Turrish, 247 U.S. 221 (1918); Doyle v. Mitchell Bros. Co., 247 U.S. 179 (1918); 31 Op. Att'y Gen. 304 (1918); T.D. 2747, 20 Treas. Dec. Int. Rev. 457 (1918).
(133) See O'Gilvie, 117 S. Ct. at 455.
(134 See id. (noting that the Schleier Court characterized ADEA liquidated damages as punitive, not compensatory).
(135) Id. at 457-58. Presumably, however, one could have as easily argued that Congress assumed punitive damages based on a physical injury were taxable and that the amendment was simply to clarify that those based on a nonphysical injury were likewise taxable. The provision was breathtaking in its ambiguity.
(136) See id at 458.
(137) See id at 460 (Scalia, J., dissenting) (starting with the statement, "[s]ection 104(a)(2), as it stood at the time relevant to th[is] case, provided an exclusion from income for `any damages received ... on account of personal injuries or sickness," Scalia explored the meaning of this section).
(138) See id
(139) I.R.C. [sections] 104(a)(1)-(a)(2) (1994).
(40) See O'Gilvie, 117 S. Ct. at 461.
(141) See id at 462-63.
(142) See Commissioner v. Miller, 914 F.2d 586 (4th Cir. 1990).
(143) See Wesson v. United States, 48 F.3d 894 (5th Cir. 1995).
(144) See Hawkins v. United States, 30 F.3d 1077 (9th Cir. 1994).
(145) See Reese v. United States, 24 F.3d 228 (Fed. Cir. 1994).
(146) See Horton v. Commissioner, 33 F.3d 625 (6th Cir. 1994).
(147) See Small Business Job Protection Act of 1996, Pub. L. No. 104-188, [sections] 1605(d), 110 Stat. 1755, 1838-39.
(148) See id. [sections] 1605(a), 110 Stat. at 1838.
(149) See id. [sections] 1605(c), 110 Stat. at 1838. However, this exclusion applies only if such a state law was in effect on or before September 13, 1995.
(150) See id. [sections] 1605(a), 110 Stat. at 1838.
(151) See id. [sections] 1605(b), 110 Stat. at 1838. In a footnote in the Conference Report the Committee included symptoms of emotional distress such as stomach disorders, headaches, and insomnia within the meaning of that term. See H.R. Conf. Rep. No. 104-737, at 301 n.56 (1996), reprinted in 1996 U.S.C.CAN. 1677, 1793.
(152) See H.R. Conf. Rep. No. 104-737, at 301.
(153) See id. Such a result is leas certain, however, if the employment discrimination involves a sexual harassment claim based on physical touching.
(154) H.R. Rep. No. 104-586, at 143-44 (1996).
(155) See, e.g., Commissioner v. Jacobson, 336 U.S. 28, 49 (1949) (stating that exclusions should be construed with restraint in light of the policy to tax income comprehensively).
(156) See Robinson v. Commissioner, 70 F.3d 34, 38 (5th Cir. 1995) (affirming the Tax Court's reallocation of settlement proceeds), cert. denied, 117 S. Ct. 83 (1996).
(157) See Delaney v. Commissioner, 99 F.3d 20, 24 (1st Cir. 1996) (approving of the Tax Court's inquiry into proper allocation of settlement amount); Bagley v. Commissioner, 105 T.C. 396, 410 (1995) (reallocating settlement proceeds based on the court's interpretation of a correct allocation), aff'd, 97-2 U.S. Tax Cas. (CCH) [para.] 50,586 (8th Cir. Aug. 6, 1997).
(158) See Nicholson & Chapman, supra note 84, at 114-15.
(159) Susan A. Bocamazo, Tax on Damages Is Causing Big Headaches for Plaintiffs' Lawyers, Law. Wkly. USA, Jan. 27, 1997, at 1.
(160) See id.…