Case: Emotional Distress-Related Settlement Proceeds Not Excludible From Gross Income Under Physical Damages Provision (T.C. Memo) (IRC §104)

Settlement proceeds that Taxpayer received to compensate for “emotional distress, humiliation, and lost income” does not qualify for exclusion from Taxpayers’ gross income under I.R.C. §104(a)(2), which shields damages received “on account of personal physical injuries or physical sickness,” the U.S. Tax Court held in a memorandum opinion, sustaining the IRS’s deficiency determination. As project director of a federal grant that a university had received, Taxpayer had reported misuse of funds and in state court alleged that the university and related defendants retaliated against him. In the settlement agreement, the Tax Court noted, “the parties characterized the payment ...