Lawsuit Awards and Settlements

Table of Contents

• Introduction

• Chapter 1, Issues
  • Issues for Lawsuit Proceeds Received Prior to August 21, 1996
  • Issues for Lawsuit Proceeds Received After August 20, 1996

• Chapter 2, Taxability of Lawsuit Payments
  • Terminology/Definitions
    • Types of Claims
    • Types of Damages/Awards
    • Types of Settlements
    • Tax Treatment of Awards and Settlements

• Chapter 3, Other Related Topics
  • Payroll and Self-Employment Tax Considerations
  • Amount to be Included in Income
  • Deduction for Attorneys
  • Legal Fees Relating to Non-Taxable Awards or Settlements
  • Accrued Interest on Court Judgments

• Chapter 4, Sources of Information
  • Newspaper Articles
  • Courthouse Research
  • Computerized Data
  • Settlement Payors
  • State Department of Insurance
  • State Supreme Court Library

• Chapter 5, Third Party Contacts and Summons Information
  • Third Party Letter
  • Issuance of Summons
  • "John Doe" Summons
  • Third Party Summonses
  • Other Considerations
  • Attorney-Client Privilege
  • References

• Chapter 6, Building the Case File
  • Identifying the Taxpayer
  • Information Necessary for the Examination Case File

• Chapter 7, Examination Considerations
  • Scope of Examination
  • Examination Action Plan

• Chapter 8, Penalties

• Chapter 9, Form 1099-MISC - Reporting Requirements
  • Reporting of Damage Awards on Forms 1099-MISC
  • Reporting Payments to Attorneys on Form 1099-MISC

• Chapter 10, Quick Cite and Brief Synopsis Of Litigated Cases
  • Wrongful Death
  • Age Discrimination
  • Sex Discrimination
  • Discrimination Cases Prior to Burke and Schleier
  • Employment Related
  • Legal Fees
  • Insurance Company Cases
  • Miscellaneous

• Appendix
  • Appendix A, Sample Lawsuit Information Data Sheet
  • Appendix B, Sample Attachment to Letter
  • Appendix C, Information Document Request
  • Appendix D, Excerpts from Legislative History of 1996 Amendment

IRC section 6041(a) generally requires all persons engaged in a trade or business and making payment in the course of such trade or business to another person of fixed or determinable gains, profits, and income of $600 or more in a calendar year to file an information return with the Service. IRC section 6041(d) provides that each person required to make the return described in IRC section 6041(a) shall furnish to each person for whom a return is required a payee statement.

Treas. Reg. section 1.6041-1(c) states that income is fixed when it is paid in amounts definitely predetermined. Income is determinable whenever there is a basis of calculation by which the amount to be paid may be ascertained. The payor is required to determine whether payments are taxable and need to be reported. The Instructions for Forms 1099, 1098, 5498 and W-2G provides instructions on the items to be reported.

In lawsuit settlements, the person with the obligation to report payments to the plaintiff will generally be the defendant or its insurer rather the plaintiff's attorney. In addition, the defendant or its insurer will also generally be responsible for reporting payments to the plaintiff's attorney.

Reporting of Damage Awards on Forms 1099-MISC

Box 3 of Form 1099-MISC is used to report other income that is not reportable in one of the other boxes on the form. Generally, all punitive damages (even if they relate to physical injury or physical sickness), any damages for non-physical injuries or sickness, liquidated damages received under the Age Discrimination in Employment Act of 1967, and any other taxable damages are required to be reported in box 3. Generally, all compensatory damages for non-physical injuries or sickness (for example, emotional distress) arising from employment discrimination or defamation are reportable in box 3. However, if a taxpayer receives an award of back pay that constitutes wages, it generally would be reportable on Form W-2, not Form 1099-MISC.

The following damages (other than punitive damages) are not reportable in box 3 of Form 1099-MISC:

1. Damages received on account of personal physical injuries or physical sickness.

2. Damages that do not exceed the amount paid for medical care for emotional distress; or

3. Damages received on account of non-physical injuries (for example, emotional distress) under a written binding agreement, court decree, or mediation award in effect on or issued by September 13, 1995.

Damages received on account of emotional distress due to non-physical injury or sickness, including physical symptoms such as insomnia, headaches, and stomach disorders, are reportable unless described in 2 or 3 above. However, damages received on account of emotional distress due to physical injuries or physical sickness are not reportable.

The amount of damages reflected on the Form 1099-MISC is not reduced by attorney's fees. For example, a defendant settles a plaintiff's claim for emotional distress from non-physical injuries by writing a $100,000 check naming the plaintiff and her attorney as joint payees. The attorney retains $40,000 in fees for services rendered and remits the remaining $60,000 to the plaintiff. The amount of damages reportable with respect to the plaintiff on Form 1099-MISC is $100,000.

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Fees paid to an attorney of $600 or more, paid in the course of the payor's trade or business, are reportable in box 7 of Form 1099-MISC. However, for 1998 and later years, if the payor pays an attorney in the course of its trade or business for legal services and the attorney's fee cannot be determined, the total amount paid to the attorney (gross proceeds) must be reported in box 13 with Code A.

For example, an insurance company pays a plaintiff's attorney $100,000 to settle a plaintiff's claims for damages that are excludable from income under IRC section104(a)(2). The attorney's fee cannot be determined by the insurance company. Therefore, the insurance company must report $100,000 in box 13 of Form 1099-MISC with Code A. If the insurance company knows that the attorney's fee is, for example, $34,000, the insurance company must report $34,000 in box 7 and nothing in box 13.

These rules apply whether or not the legal services are provided to the payor, and whether or not the attorney is the exclusive payee (for example, the attorney's and claimant's names on one check). However, these rules do not apply to profits distributed by a partnership to its partners that are reportable on Schedule K-1 (Form 1065), Partner's Share of Income, Credits, Deductions, etc., or to wages paid to attorneys that are reportable on Form W-2, Wage and Tax Statement. The term "attorney" includes a law firm or other provider of legal services.

In addition, the exemption from reporting payments made to corporations no longer applies to payments for legal services. Therefore, for 1998 and later years, attorney fees (in box 7) or gross proceeds (in box 13), as described above, paid to corporations providing legal services are reportable.

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Burford v. United States, 642 F. Supp. 635 (N.D. Ala. 1986).

The district court rejected Rev. Rul. 84-108 and concluded that Alabama wrongful death proceeds are excludable from gross income.

O'Gilvie v. United States, (1996 S. Ct.) 519 U.S. 79, 117 S. Ct. 452; 96-2 U.S.T.C. 50,664; 78 AFTR 2d 7454.

The Supreme Court ruled that all non-compensatory punitive damages are taxable.

The Supreme Court ruled that payments received under the federal statute outlawing age discrimination are 100-percent taxable. The ADEA does not provide for recovery of tort-like compensatory damages and the proceeds were not received on account of any personal injury.

Schleier outlined the two-part test that must be met in order to exclude damages under IRC section 104(a)(2): 1) the underlying cause of action giving rise to the recovery must be based on tort or tort-type rights; and 2) the damages must "have been received on account of personal injuries or sickness."

The Supreme Court ruled that back pay received in settlement of claims under Title VII of the Civil Rights Act of 1964, before the 1991 amendments, were not excludable under IRC section 104(a)(2).

The Burke case includes a very good discussion on tort injuries, physical, non-physical, etc.

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The following is a list of other cases that deal with various discrimination claims. All of these are prior to the Supreme Court rulings of Burke and/or Schleier which contain our present authority for these types of cases. While these cases fluctuate on the question of taxability or exclusion (because they are prior to the clear guidance of Burke and Schleier) they contain some good discussions concerning the questions of defining torts and personal injuries, physical and non-physical.

1. Downey v. Commissioner, (1994 7th Cir.) 94-2 U.S.T.C. 50,441; 74 AFTR 2d 6015. In Schleier, the Supreme Court agreed with the discussion relating to torts and the court's holding on the exclusion issue.

2. Johnson-Waters v. Commissioner (1993 Tax Court) 66 T.C.M. 252; T.C. Memo. 1993-333. This case includes good comments about the taxpayer having the burden of proof and "self serving testimony" concerning an out of court settlement allocation. The IRS reallocation to back pay with a small amount for tort-mental distress was upheld. Note, however, the court's holding that the back pay portion recovered under 42 U.S.C. section 1981 is taxable is inconsistent with the rationale underlying Rev. Rul. 93-88.

3. Stocks v. Commissioner, (1992 Tax Court) 98 T.C. 1. This case involves an employment breach of contract and race discrimination issue. No actual lawsuit was filed, but claims were "settled" with an employment termination agreement. The Tax Court looked at the payor's intent in allocating 5/6 of the settlement to the contract and 1/6 of the settlement to the discrimination claim. The evidence showed that the employer was aware of the possibility of the discrimination lawsuit. Their intent was that the payment would settle the potential discrimination lawsuit along with the breach of contract issue. The employer admitted it would not have made the payment unless the taxpayer released them from any discrimination claim as well as the contract claim.

4. Pistillo v. Commissioner, (1989 Tax Court) 57 T.C.M. 874; T.C. Memo.1989-329. The Tax Court found that an ADEA back pay settlement was 100-percent taxable. This decision was later reversed by the 6th Circuit, but contains good comments on several areas of interest including damages and settlements arising from employment contracts, back pay, etc., not excludable under IRC section 104(a)(2). The taxpayer argued that his employer's failure to withhold any federal income tax or social security taxes from the settlement demonstrated its intent to compensate for personal injury. The taxpayer further argued that because the District Court, his attorney, and the IRS stated that the settlement payment was not income, the amount is excludable.

5. Bent v. Commissioner, (1987 3d Cir.) 88-1 U.S.T.C. 9101; 61 AFTR2d 301; 835 F.2d 67. The court ruled that the settlement amount received for violation of the taxpayer's rights to freedom of speech was excludable under IRC section 104(a)(2). If decided after Schleier, taxpayer would fail the second test for exclusion. See Kightlinger v. Commissioner, T.C. Memo. 1998-357, infra.

6. Metzger v. Commissioner (1987 Tax Court) 88 T.C. 834. This was a case involving employment breach of contract and discrimination by sex and national origin. The continued vitality of this case is questionable in light of Burke and Schleier. The Service does not believe that economic damages such as wages can be a measure of a personal injury. Such damages are distinct from personal injury damages.

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The following cases are Employment related and most deal with allocation issues and questions of taxable versus excludable.

1. Barnes v. Commissioner, (1997) T.C. Memo. 1997-25.

   This case involved an out-of-court settlement received due to wrongful discharge with mental distress. The Tax Court allocated 50/50 to mental distress and punitive damages because the mental distress manifested as pre-cancerous tumors.

2. Bagley v. Commissioner, (1995) 105 T.C. 396, aff'd, 121 F.3d 393 (8th Cir. 1997).

   This case involved claims for tortious interference with current and future employment, libel, and invasion of privacy. The trial resulted in a jury verdict that was appealed. A settlement agreement was reached prior to the new trial. This settlement agreement allocated the entire award to compensatory. The Tax Court looked to the facts of the case, including the trial determinations and the negotiations for settlement. The Tax Court determined that a portion should be allocated to punitive, even though the payor stated in negotiations that they would not agree to pay punitive damages. The Tax Court determined that both parties considered the clear possibility of punitive damages being recovered. The Tax Court pointed out that the taxpayer's attorney became aware of the potential for taxability of punitive during the negotiations.

3. Glatthorn v. United States, (1993) 93-1 U.S.T.C. 50,338; 71 AFTR 2d 1878; 818 F. Supp. 1548 (District Ct -Florida).

   This case involved a breach of contract claim. The plaintiff received an out-of-court settlement with no settlement document. The court allocated 50 percent of the proceeds to the breach of contract issue and 50 percent as compensatory. When making this decision, the district court relied heavily upon the following:

   The taxpayer offered to settle for $45,000. The defendants did not accept his offer until after the court had refused to dismiss the tort claims. Shortly after that time, the defendants accepted the settlement. The district court said that the defendants (attorneys, themselves) would not have settled a $47,000 breach of contract case for $45,000 in the early stages of the lawsuit - so the settlement had to also relate to the tort claims.

   The taxpayer argued that at least 9/11 of the settlement is non-taxable, as 9 of the 11 counts sounded in tort. The district court refused to apply this mathematical formula, particularly since many of the tort counts stated the same cause against different defendants.

4. Miller v. Commissioner, (1993) 65 T.C.M. 1884; T.C. Memo. 1993-49.

   This was a defamation case against a former employer. There were two separate lawsuits. One involved a jury verdict and the other suit was not tried. A settlement was reached which covered both lawsuits. The settlement agreement did not allocate the proceeds between compensatory and punitive damages.

   The question presented to the Tax Court was one of allocation between compensatory and punitive. The Tax Court ruled that the verdict by the jury was the best indicator of the payor's intent and the best measure of how the settlement should be allocated.

   Miller includes good analyses and case cites pertaining to settlement allocations. It also includes comments concerning the importance of the nature of the claim versus the validity of the claim in determining the allocation.

5. Mitchell v. Commissioner (1990) 60 T.C.M. 1368; T.C. Memo. 1990-617.

   The taxpayer had prepared a settlement document stating that most of the damages were for libel and slander. The Tax Court determined that all damages related to the employment contract. The taxpayer's employer viewed the libel/slander suit as a "nuisance" suit and gave it no weight in determining the settlement payments.

6. McKim v. Commissioner (1980) 40 T.C.M 9; T.C. Memo. 1980-93.

   The taxpayer sued his former employer after being terminated. His first claim was for unpaid sales commissions and other unpaid job related amounts, such as fringe benefits and unreimbursed expenses. He also brought a claim for suffering, emotional distress and for punitive damages. The court allocated the whole settlement to taxable wages. The court looked to testimony from the taxpayer's employer to determine which claim it had intended to settle. The employer stated it did not believe it had any exposure to liability for any claims for personal injury damages and that these claims did not figure into the settlement amount.

   In conclusion, the Tax Court stated that even if it found that the employer had intended to pay some on each of the taxpayer's claims, the allocation to personal injury would have been minimal. The Tax Court totaled up all the amounts requested in each count (taxpayer had assigned monetary amount to each claim) and determined that the percentage of the personal injury amount requested would only be 15 percent.

7. Seay v. Commissioner (1972) 58 T.C. 32.

   This case involved a breach of contract claim. The taxpayer was allowed to exclude a portion of the payment under IRC section 104(a)(2) for personal injuries. The taxpayer had suffered personal embarrassment, mental and physical strain, and injury to health and personal reputation.

   The government argued that the taxpayer had not proven that his claim for personal injuries was valid or that he had actually incurred such injuries. The court gives an in-depth explanation concerning the fact that the taxpayer does not have to prove the validity of the claim. The taxpayer only has to prove that there was a personal injury claim and that the claim was included in the settlement payment. In this case, the taxpayer was able to show that the personal injury claim had been a part of the negotiations for settlement and that the payor intended to make payment in settlement of that claim.

8. Knuckles v. Commissioner (1965) 65-2 U.S.T.C. 9629; 16 AFTR 2d 5515; 349 F.2d 610.

   Tenth Circuit affirmed the Tax Court. The taxpayer was fired from his executive position based on allegations that he mismanaged the company's affairs. The taxpayer originally sued for breach of contract with no mention of personal injuries. During settlement negotiations the taxpayer's attorney suggested the payment be allocated to personal injuries in order to minimize the tax effect. The taxpayer's employer refused to allocate any damages to personal injury and admit to any liability for personal injury. The taxpayer filed a subsequent personal injury suit 9 months later. Both suits were dismissed with the out-of-court settlement. The Service allocated all to breach of contract (taxable). Taxpayer had allocated all to personal injury (non-taxable). The Tax Court upheld the Service's determination and the Appeals Court affirmed. The Appellate Court stated that the most important fact is "intent of payor."

9. Abrahamsen v. United States, 44 Fed. Cl. 260 (1999) appeal pending, No. 99-5136 (Fed. Cir.).

   In this consolidated case, approximately 2,600 former employees of IBM sought refunds of income and FICA taxes on the basis that payments received under certain resource reduction programs were excludable from gross income as personal injury damages and consequently were not wages. Noting that none of the plaintiffs instituted a claim against IBM before executing releases and receiving the payments, the court doubted that they satisfied the first test for exclusion. Even if they did satisfy that test, the court concluded, the plaintiffs failed to satisfy the second test that the payments were received "on account of personal injuries."

   On the FICA issue, the court reasoned that because the payments were linked to salary and length of tenure, the payments were consistent with the notion of wages.

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1. Church v. Commissioner (1983) 80 T.C. 1104.

   Case includes formula for allocating legal fees between taxable and non-taxable portions of awards and settlement proceeds for purposes of IRC sections 212 and 265.

2. Alexander v. Internal Revenue Service (1995) 96-1 U.S.T.C. 50,011; 72 F.3d 938; (1st Cir.).

   Great case on legal fees issue. Gross versus net, itemized deductions, and AMT comments included. See also Bagley, 121 F.3d 393 (8th Cir. 1997); Baylin, 43 F.3d 1451 (Fed. Cir. 1995); Coady, T.C. Memo. 1998-291, aff'd, 213 F.3d 1187 (9th Cir. 2000); Srivastava, T.C. Memo. 1998-362, rev'd, 86 AFTR2d 2000-5104 (5th Cir. 2000) ; Sinyard, T.C. Memo. 1998-364; and Benci-Woodward, T.C. Memo. 1998-395, aff'd, 86 AFTR2d 2000-5102 (9th Cir. 2000).

1. Lane v. United States (1995) 95-2 U.S.T.C. 50,455, 76 AFTR2d 6085; 902 F. Supp. 1439 (Dist. Ct. Oklahoma).

   This case involves a claim on an auto insurance policy for uninsured motorists. Basically this is a punitive damage issue case. Note, however, that under Oklahoma law, compensatory damages awarded for insurance bad faith do not compensate for any personal injury. Rather, they constitute in large part compensation for the loss of the use of the contract damages, and in lesser part, additional attorney's fees incurred as a result of the insurer's failure to pay the claim in a timely fashion. Thus, under Schleier, they are not excludable from gross income. However, there are some good points in general concerning suits against insurance companies.

2. Est. of Wesson v. United States (1995) 95-1 U.S.T.C. 50,186, 75 AFTR2d 1540; 48 F.3d 894 (5th Cir.).

   Punitive damage issue that involved bad faith against a life insurance company is addressed in this case.

3. Hawkins v. United States (1994) 94-2 U.S.T.C. 50,386, 74 AFTR2d 5363; 30 F.3d 1077 (9th Cir.).

   Punitive damage issue that involved breach of good faith and fair dealing against Allstate Insurance Company is addressed in this case. Contains a description of shifting Service position on taxation of punitive damages.

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1. Brabson v. United States (1996) 96-1 U.S.T.C. 50,038, 77 AFTR2d 572, 73 F.3d 1040 (10th Circuit), rev'g 859 F. Supp. 1360 (D. Colo. 1994).

   This case involves a personal injury claim. The family was injured by a gas leak in their home. The only issue was the question of whether the pre-judgment interest is excludable under IRC section 104. The district court ruled that the interest was not taxable but the Tenth Circuit reversed.

2. Robinson v. Commissioner (1994) 102 T.C. 116 (Tax Court) (affirmed on allocation by 5th Cir.).

   The taxpayer's out of court settlement allocation was set aside for tax purposes because the negotiations were not conducted in an adversarial manner. The taxpayer was given the freedom to allocate as he wanted in order to minimize the tax effect.

3. Eisler v. Commissioner (1973) 59 T.C. 634.

   Eisler is often quoted in litigation cases. This case involved a business deduction issue. The issue was whether taxpayer could deduct the settlement payment and legal fees under IRC section 162 as a business expense or whether they were to be capitalized.

   The court looked to the strength of the parties' various claims as perceived by their counsel in order to allocate a portion to ordinary and capital.

   The case includes comments on doing the best you can with the information you have.

4. LeFleur v. Commissioner, (1997) T.C. Memo. 1997-312.

   LeFleur is an employment related case, but its particular importance lies in the area of reallocation issues. In this case the IRS successfully reallocated $800,000 from nontaxable emotional distress claims to taxable contract/punitive damage claims. (See Chapter 2 for additional information.)

5. Fabry v. Commissioner, 111 T.C. 305 (1998).

   In Fabry, the Tax Court amplified its prior holdings on the taxability of damages received for injury to an individual's business/professional reputation. The court rejected taxpayer's argument that such injury is, as a matter of law, a personal injury for IRC section 104(a)(2) purposes. Instead, the court held, whether injury to one's business or professional reputation constitutes a personal injury is a question of fact to be resolved by consideration of all the facts and circumstances. Because the taxpayer made no claim for personal injury in the underlying product liability action, the court concluded that the portion of the settlement proceeds allocable to taxpayer's claim for injury to his business reputation was not excludable from gross income.

6. Kightlinger v. Commissioner, T.C. Memo. 1998-357.

   In Kightlinger, the court correctly interpreted Schleier and held that loss of a job does not constitute a personal injury. Also, the court concluded, the economic factors were not a measure of personal injury; rather, they were the injury itself that the taxpayer sustained. Further, the Tax Court, in view of all the contrary evidence in the record, rejected the district court's holding that the suit was for personal injuries suffered by the class members.

7. Gregg v. Commissioner, T.C. Memo. 1999-10.

   In Gregg, the court rejected the taxpayers' argument that compensatory damages received for common law fraud and tortious interference with business relationship were excludable from gross income.

8. Hemelt v. United States, 122 F.3d 204 (4th Cir. 1997); Mayberry v. United States, 151 F.3d 855 (8th Cir. 1998); Dotson v. United States, 87 F.3d 682 (5th Cir. 1996); and Gerbec v. United States, 164 F.3d 1015 (6th Cir. 1999).

   A conflict among the circuits exist on whether payments received in settlement of claims arising under ERISA qualify for exclusion under IRC section 104(a)(2). The Government's position is that notwithstanding the subjective belief of the parties that the statute provided for tort relief, the subsequent determination of the Supreme Court that ERISA does not provide tort remedies is controlling for tax purposes. Two circuits (and two dissenters in the other circuits) agreed that taxpayers failed to meet the first requirement for exclusion. Notwithstanding the intercircuit conflict, the Solicitor General disagreed with Service's recommendation that Supreme Court review is warranted. This disagreement is founded on the fact that Congress, in 1996, amended IRC section 104(a)(2) to provide that the exclusion applies to damages received for personal physical injuries only. Because ERISA does not authorize the recovery of such damages, the administrative importance of the income tax issue has diminished.

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Sample Attachment to Letter

With respect to the settlements your company paid to the following (the name of your state) residents:

List of Plaintiffs

Please provide the following information:

1. Plaintiff's address, phone number, and Social Security Number,
2. Copies of the complaints,
3. Copies of the settlement agreements and/or waivers,
4. Copies of front and back of the checks.
5. Copies of any records documenting correspondence between your company and the plaintiffs with respect to negotiations affecting the outcome of the cases.

Please notify me as soon as possible if the requested information will require a summons.

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Excerpts from Legislative History of 1996 Amendment

5. Modify exclusion of damages received on account of personal injury or sickness (sec. 1605 of the bill and sec. 104(a)(2) of the Code)

Present Law

Under present law, gross income does not include any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injury or sickness (sec. 104(a)(2)).

The exclusion from gross income of damages received on account of personal injury or sickness specifically does not apply to punitive damages received in connection with a case not involving physical injury or sickness. Courts presently differ as to whether the exclusion applies to punitive damages received in connection with a case involving a physical injury or physical sickness.22 Certain States provide that, in the case of claims under a wrongful death statue, only punitive damages may be awarded.

Courts have interpreted the exclusion from gross income of damages received on account of personal injury or sickness broadly in some cases to cover awards for personal injury that do not relate to a physical injury or sickness. For example, some courts have held that the exclusion applies to damages in cases involving certain forms of employment discrimination and injury to reputation where there in no physical injury or sickness. The damages received in these cases generally consists of back pay and other awards intended to compensate the claimant for lost wages or lost profits. The Supreme Court recently held that damages received could not be excluded from income.23 In light of the Supreme Court decision, the Internal Revenue Service has suspended existing guidance on the tax treatment of damages received on account of other forms of employment discrimination.

Reasons for Change

Punitive damages are intended to punish the wrongdoer and do not compensate the claimant for lost wages or pain and suffering. Thus, they are a windfall to the taxpayer and appropriately should be included in taxable income. Further, including all punitive damages in taxable income provides a bright-line standard which avoids prospective litigation on the tax treatment of punitive damages received in connection with a case involving a physical injury or physical sickness.

Damages received on a claim not involving a physical injury or physical sickness are generally to compensate the claimant for lost profits or lost wages that would otherwise be included in taxable income. The confusion as to the tax treatment of damages received in cases not involving physical injury or physical sickness has led to substantial litigation, including two Supreme Court cases within the last four years. The taxation of damages received in cases not involving a physical injury or physical sickness should not depend on the type of claim made.

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²² The Supreme court recently agreed to decide whether punitive damages awarded in a physical injury lawsuit are excludable from gross income. O'Gilvie v. U.S., 66F.3d 1550 (10th Cir. 1995), cert. granted, 64 U.S.L.W. 3639 (U.S. March 25, 1996)(No. 95-966). Also, the Tax Court recently held that if punitive damages are not of a compensatory nature, they are not excludable from income, regardless of whether the underlying claim involved a physical injury or physical sickness. Bagley v. Commissioner, 105 T.C. No. 27 (1995).

²³ Schleier v. Commissioner, 115 S.Ct. 2159 (1995).

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