LawyersUSA

Damages awarded to an age discrimination plaintiff for "severe emotional distress" are not excludable from gross income, the U.S. Tax Court has ruled.

The plaintiff was laid off as part of a workforce reduction. His supervisor told him that he was selected for termination on the basis of his age and pay.

He filed an age discrimination lawsuit, which settled for $120,000. The settlement included $44,250 in lost wages and $75,750 for emotional damages and pain and suffering.

On his federal income tax return, the plaintiff reported $44,250 of the $120,000 payment as wages, but did not include the $75,750 as "other income."

The IRS determined that the $75,750 was not excludable from gross income.

The court agreed.

"Congress amended [the Internal Revenue Code] to specifically address the issue of whether damages for emotional distress are excluded from gross income and determined that such damages generally are not excludable from income," the court said.

"[T]the settlement agreement explicitly states that [the plaintiff] 'presented evidence of serious emotional distress' … and it does not contain language indicating that [he] presented any evidence of physical injuries or physical sickness. … [The Code] requires not only that damages compensate for personal injury, but also that the injury be physical. The settlement agreement makes no allusion to compensation for a physical injury or physical sickness. There is no apportionment of any of the settlement proceeds to a physical injury or physical sickness."

The court said, however, that the plaintiff was not liable for the penalty because he "reasonably and in good faith relied on [his] tax preparer" and disclosed the basis for excluding $75,750 from income on his tax return

U.S. Tax Court. Pettit v. Commissioner, No.23666-05. April 7, 2008. Lawyers USA No. 9939721. Click here for the full text of any of this opinion.