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Posted by Mark Bole on February 23, 2007, 6:50 am
Please log in for more thread options Stuart A. Bronstein wrote:
>> I know compensation for injury is not taxable and punative
>> damages are. However, a lawyer mishandled a case for
>> personal injury and the victim won a malpractice suit
>> against him. I keep thinking some, if not all, is a
>> substitute for what he should have received for injury. I
>> can't find malpractice in the list of taxable vs non-taxable
>> settlements.
> Does the malpractice verdict allocate damages recovered
> between the different types of damages that were being sued
> for?
>
> I think your instinct is correct - the type of damages will
> relate back to the original case. What was recovered in the
> malpractice case should have the same effect as if it had
> been recovered in the original case.
Agree -- if you can tie the settlement back to the original
event it should retain the character of that event. This
seems to me to be similar to a legal settlement against a
financial manager, for example, for breach of fiduciary duty
to a client resulting in a capital loss. The recovery would
be a capital gain to offset against the loss carryover,
rather than ordinary income.
The part of the settlement that goes to attorney's fees is
ordinary income to be included on line 21 of form 1040,
partially offset by a miscellaneous deduction on schedule A
subject to 2% AGI floor.
The Murphy case, referred to in another reply, had to do
with non-physical injury rather than physical injury. That
is a different matter, AFAIK, and is still being litigated.
-Mark Bole
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