Double Trouble: Taxability of Repeated Injury Lawsuits

Published Categorized as Federal Income Tax, Lawsuit Awards, Tax
Serial Irs Whistleblower Cannot Remain Anonymous
Serial Irs Whistleblower Cannot Remain Anonymous

As human beings, we strive to understand the laws of nature and our place in the world. Despite the advancements in technology, research, and science, there still remains much that is unknown.

However, we do observe patterns and repetitions in both the natural world and human behavior. With each passing experience and as we age, we gain deeper insights into these patterns. While some may attribute this to wisdom, others see it as projecting human traits onto the natural world. Nonetheless, one thing is certain – humans tend to repeat their behavior and create similar histories, time and time again.

That brings us to the Rajcoomar v. Commissioner, T.C. Memo. 2017-129 case. It is a case of repeating human behavior. The question in the case is whether personal injury awards remain tax-free even if discrimination is involved. The Rajcoomar case sheds light on this question, as the court tackled the issue of taxability for a second award received by a taxpayer due to discrimination by their employer following a non-taxable award for personal physical injury or sickness.

The Facts in Rajcoomar

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.

Origin of the Claim Analysis

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 sicknesses 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.

Consideration of 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 carry over 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 employer discrimination had happened moments after the taxpayer suffered 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.

The Takeaway

This case raises important questions about the taxability of settlement awards in the context of personal physical injuries or sickness and discrimination. The court in this case looked at the origin of the second claim, which was related to discrimination, and concluded that the award for that claim was taxable, as it was received on account of discrimination and not for physical injuries or sickness.

However, the court’s analysis leaves some questions unanswered, such as whether the physical injuries that the taxpayer was compensated for with the first damage award can carry over to the second settlement agreement award and be considered in determining whether it is non-taxable. Additionally, the court did not address whether the second settlement agreement award would be non-taxable if discrimination had happened immediately after the taxpayer suffered physical injuries.

Despite these uncertainties, it is clear that the origin of the claim analysis should be applied on a claim-by-claim basis, even when there are two related claims. This highlights the importance of careful consideration and thorough analysis of settlement agreements in order to determine the tax implications of awards related to personal physical injuries or sickness and discrimination.

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