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Subject Author Date
Tax Treatment of Settlement Paultry 08-08-2008
Posted by Paultry on August 8, 2008, 3:41 pm
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Taxpayer, a municipal employee, sustained an on-the-job
injury in 2002. Taxpayer filed suit against the
municipality, asserting a claim for workman's comp benefits,
and a claim for retaliatory termination in violation of
state workman's comp law.

Taxpayer reached a settlement of his workman's comp benefit
claim and received payment of that claim directly from the
municipality's insurance carrier.

Taxpayer and the municipality agreed on a cash payment
amount to settle the retaliatory termination claim. Per the
settlement, the payment was made, "...solely in order to
compromise and purchase peace, to avoid the vexation and
expense of litigation, and does not and is not to constitute
an admission of any liability, but on the contrary is being
paid with the express understanding of the denial of any
liability."

Wording of the retaliatory termination claim settlement
indicates (to me) its payment did not represent punitive
damages.

Since the retaliatory termination claim had its origin in a
physical injury, does the settlement amount paid by the
municipality qualify as compensatory damages which enjoy the
IRC 104(a)(2) exclusion from gross income?

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Posted by Alan on August 8, 2008, 6:07 pm
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Paultry wrote:
> Taxpayer, a municipal employee, sustained an on-the-job injury in 2002.
> Taxpayer filed suit against the municipality, asserting a claim for
> workman's comp benefits, and a claim for retaliatory termination in
> violation of state workman's comp law.
>
> Taxpayer reached a settlement of his workman's comp benefit claim and
> received payment of that claim directly from the municipality's
> insurance carrier.
>
> Taxpayer and the municipality agreed on a cash payment amount to settle
> the retaliatory termination claim. Per the settlement, the payment was
> made, "...solely in order to compromise and purchase peace, to avoid the
> vexation and expense of litigation, and does not and is not to
> constitute an admission of any liability, but on the contrary is being
> paid with the express understanding of the denial of any liability."
>
> Wording of the retaliatory termination claim settlement indicates (to
> me) its payment did not represent punitive damages.
>
> Since the retaliatory termination claim had its origin in a physical
> injury, does the settlement amount paid by the municipality qualify as
> compensatory damages which enjoy the IRC 104(a)(2) exclusion from gross
> income?
>
I don't have a citation or case but I believe they are
independent of each other. One part deals with physical injury
and a workers comp claim. The other part deals with an employment
related claim. That would make the employment related payment
taxable. If there were legal fees and other costs involved, the
t/p would have to allocate those costs against the two revenue
streams to obtain the amount deductible (misc. itemized) for the
employment related claim.

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by D. Stussy on August 8, 2008, 6:32 pm
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> Taxpayer, a municipal employee, sustained an on-the-job
> injury in 2002. Taxpayer filed suit against the
> municipality, asserting a claim for workman's comp benefits,
> and a claim for retaliatory termination in violation of
> state workman's comp law.
>
> Taxpayer reached a settlement of his workman's comp benefit
> claim and received payment of that claim directly from the
> municipality's insurance carrier.
>
> Taxpayer and the municipality agreed on a cash payment
> amount to settle the retaliatory termination claim. Per the
> settlement, the payment was made, "...solely in order to
> compromise and purchase peace, to avoid the vexation and
> expense of litigation, and does not and is not to constitute
> an admission of any liability, but on the contrary is being
> paid with the express understanding of the denial of any
> liability."
>
> Wording of the retaliatory termination claim settlement
> indicates (to me) its payment did not represent punitive
> damages.
>
> Since the retaliatory termination claim had its origin in a
> physical injury, does the settlement amount paid by the
> municipality qualify as compensatory damages which enjoy the
> IRC 104(a)(2) exclusion from gross income?

None of it is excludible. The settlement does NOT say that the amount is
for compensation for personal injuries nor does it allocate an amount to
such. In the absence of such, the courts have generally ruled that the
entire payment is taxable. Although the origin of ONE OF the claims is a
personal injury, the other was not (termination of employment), and
therefore without an allocation, the taxpayer is screwed. He should sue any
attorney who represented him for malpractice for not considering this.

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by Gil Faver on August 8, 2008, 9:34 pm
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>> Taxpayer, a municipal employee, sustained an on-the-job
>> injury in 2002. Taxpayer filed suit against the
>> municipality, asserting a claim for workman's comp benefits,
>> and a claim for retaliatory termination in violation of
>> state workman's comp law.
>>
>> Taxpayer reached a settlement of his workman's comp benefit
>> claim and received payment of that claim directly from the
>> municipality's insurance carrier.
>>
>> Taxpayer and the municipality agreed on a cash payment
>> amount to settle the retaliatory termination claim. Per the
>> settlement, the payment was made, "...solely in order to
>> compromise and purchase peace, to avoid the vexation and
>> expense of litigation, and does not and is not to constitute
>> an admission of any liability, but on the contrary is being
>> paid with the express understanding of the denial of any
>> liability."
>>
>> Wording of the retaliatory termination claim settlement
>> indicates (to me) its payment did not represent punitive
>> damages.
>>
>> Since the retaliatory termination claim had its origin in a
>> physical injury, does the settlement amount paid by the
>> municipality qualify as compensatory damages which enjoy the
>> IRC 104(a)(2) exclusion from gross income?
>
> None of it is excludible. The settlement does NOT say that the amount is
> for compensation for personal injuries nor does it allocate an amount to
> such. In the absence of such, the courts have generally ruled that the
> entire payment is taxable. Although the origin of ONE OF the claims is a
> personal injury, the other was not (termination of employment), and
> therefore without an allocation, the taxpayer is screwed. He should sue
> any
> attorney who represented him for malpractice for not considering this.

and he should kick himself real hard for agreeing to a settlement without he
himself considering this angle.

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by Paultry on August 9, 2008, 3:26 pm
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Gil Faver wrote:

> and he should kick himself real hard for agreeing to a settlement without he
> himself considering this angle.
>

Harsh criticism of a blue collar worker who may deal with a
tax issue of this nature maybe once in his lifetime? I'm
sure he was confident that his lawyer, who took 40% of the
settlement, was looking out for the client's best interests.

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

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