Please update your browser

You're using a version of Internet Explorer that isn't supported by Questia.
To get a better experience, go to one of these sites and get the latest
version of your preferred browser:

Recent Developments concerning the Taxation of Damages under Section 104(a)(2) of the Internal Revenue Code

By Nicholson, Brent B. | Albany Law Review, Fall 1997 | Go to article overview

Recent Developments concerning the Taxation of Damages under Section 104(a)(2) of the Internal Revenue Code


Nicholson, Brent B., Albany Law Review


Introduction

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.

Background

I. The Scope of [sections] 104(a)(2)

Prior to August 21, 1996, [sections] 104(a)(2) provided:

(a) In General.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Recent Developments concerning the Taxation of Damages under Section 104(a)(2) of the Internal Revenue Code
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.