Here is a quick summary of a recent US TAX COURT case against the Internal Revenue Service to challenge the taxability of lawsuit settlement funds. The case involves money settlement received by a taxpayer from a class action against the US Air Force.
KEVIN HENNESSEY v.
COMMISSIONER OF Internal Revenue Service
Docket No. 20484-07.
The issue is whether a lump-sum amount of money the petitioner received pursuant to a class action settlement agreement is excludable from gross income under section Internal Revenue Code 104(a)(2).
Internal Revenue Code §61 (a) includes in gross income “all income from whatever source derived” unless excluded by a specific provision of the Code.
Internal Revenue Code §104 (a)(2) excludes from gross “amount of any damages received (whether by suit or agreement and whether as lump sum or as periodic payments) on account of personal physical injuries or physical sickness”.
IS MONEY FROM LAWSUIT SETTLEMENT TAXABLE?
Mr. Hennessey and other officers, whom the U.S. Air Force selected for involuntary separation because of congressionally mandated personnel reductions in the Armed Forces, filed a complaint in the U.S. Court of Federal Claims. The plaintiffs claimed that the Board in charge violated their equal protection rights under the Fifth Amendment to the U.S. Constitution because it improperly considered race and gender in selecting officers for involuntary separation. The class action case was settled and each member received a lump-sum payment. When petitioners filed their tax return, they did not include in income the lump-sum payment.
The lump-sum payment was not compensation for physical injuries or physical sickness that Mr. Hennessey might have suffered as a consequence of any actions taken by the U.S. Air Force. Therefore, the exception of Internal Revenue Code §104 (a) (2) is not applicable. The decision was entered for the Internal Revenue Service .