Settlement Award for Discrimination Related to Physical Injuries is Taxable
Damage awards received on account of personal physical injuries or physical sickness are not taxable. If a taxpayer receives a non-taxable award under this rule and then is discriminated against by his employer due to the physical injuries, is a second award paid by the employer also non-taxable? The court recently addressed this in Rajcoomar v. Commissioner, T.C. Memo. 2017-129.
The Facts in Rajcoomar
The facts of the case are as follows: The taxpayer in Rajcoomar was a security guard. He was injured in a car accident and received a $1.75 million dollar damage award for his injuries. The accident was not work-related. The taxpayer could not work after the car accident. He asked his employer to allow him to work a different job as he was not able to perform the duties of his regular job given his injuries. The employer did not accommodate the taxpayer and it ended up firing him for not reporting for work. The taxpayer eventually received a settlement award from his then former employer for the alleged discrimination due to his disability.
The Origin of the Claim
To determine whether a settlement award is taxable, the courts generally look to the origin of the claim that gave rise to the award. The question is whether the claim arose and was related to physical injuries or sickness or some other non-physical harm. Awards related to physical injuries or sickness are not taxable. Other awards are taxable.
The court in Rajcoomar only looked to the second discrimination claim to determine whether the award for that claim was non-taxable. This included looking at the language of the settlement agreement and the facts surrounding the filing of the second claim. Based on this, the court concluded that the settlement award for the second claim was taxable as it was received on account of discrimination and not for physical injuries or sickness.
Does the Origin of the Claim Continue to Other Claims
The facts in the case leave one wondering whether the physical injuries that the taxpayer was compensated for with the first damage award can carryover to and be considered in determining whether the second settlement agreement award was non-taxable? Does the origin of the claim analysis relate back to the original harm the taxpayer suffered given these facts?
Can the second claim be non-taxable as it was so closely related to and dependent on the first claim and the first claim was not taxable? Would the second settlement agreement award be non-taxable if the employer discrimination had happened moments after the taxpayer suffered the physical injuries?
The court did not address these questions. However, the court’s analysis suggests that the origin of the claim analysis is to be applied on a claim-by-claim basis even when there are two claims that are related and close in time.