Research Paper

The taxpayer filed a lawsuit to recovered damages for personal injuries sustained in a 2000 auto accident. In 2004, a jury awarded the taxpayer $1,600,000M in damages and also delay damages of $1,080,000, resulting in a total judgment of $2,700,000. The defendants appealed the award, however while the appeal was pending the parties reached a settlement, which provided for payment to the taxpayer in the amount of $2,550,000. In 2009 after attorney’s fees of $850k were deducted the taxpayer received $1,700,000.. The taxpayer wants to know how these amounts are treated for federal tax purposes.

Regarding: Federal Income Tax Consequences of damages awarded to the Taxpayer after Taxpayer was injured in an auto accident.

I. Relevant Facts: The taxpayer filed a lawsuit to recover damages for personal injuries sustained in a 2000 auto accident. In 2004, a jury awarded the taxpayer $1,620,000. In addition, delay damages in the amount of $1,080,000 were then added to that award, resulting in a total judgment of $2,700,000. The defendants appealed the award, and while the appeal was pending, the parties reached a settlement, which provided for payment to Teddy of $2,550,000. In 2009, after attorney’s fees of $850,000 were subtracted, Teddy received $1,700,000.

II. Issue:

1. How are the damages treated for tax purposes? 2. Is the attorney’s fee deductible?

III. Relevant Authorities:

A. Compensation for Injury or Sickness

Internal Revenue Code (“IRC”) Sec. 104(a) provides the general rule that-

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 that---

IRC Sec. 104 (a)(2)

the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical