Paul L. Caron

Thursday, December 15, 2011

Taxation of Damages for Wrongful Imprisonment

ExoneratedFrom our sister Sentencing Law & Policy Blog, DC Jury Awards $2.3 Million to Man Imprisoned a Decade After Wrongful Parole Revocation:

As reported in this post at The BLT, a federal jury "awarded a Washington man $2.3 million in damages on Monday for the 10 years he spent in prison after his parole was wrongfully revoked." ... 

One follow-up question (which I will pose to Paul Caron at TaxProf): Does Singletary now get to enjoy this $2.3 million award free from all federal and local taxes?  I believe that there has been some new rules and litigation of late concerning what parts of a compensatory tort award are still tax-free, and this case and the general damages verdict rended by the jury here could present an interesting set of issues concerning the nature of the harm(s) Singletary suffered from his wrongful imprisonment.

As the following TaxProf Blog posts make clear, the issue turns on whether the $2.3 million damage recovery was received on account of "personal physical injuries":

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This guy sure needs income averaging!

Posted by: AMTbuff | Dec 15, 2011 12:13:26 PM

Well, Publius. I totally agree with everything you say except for your conservative bashing. Upon what basis do you come to your conclusions? The problem is overbearing bureaucrats and activist judges. What a surprise that a conservative would agree with a liberal. How about a beer?

Posted by: Shotgun | Dec 15, 2011 10:35:28 AM

Under section 61, the proceeds of judgments and settlements are gross income. The IRS should not be in the business of deciding--by administrative fiat--whether wrongful imprisonment judgments and settlements should be excepted from gross income. Nor should the federal courts do so by judicial fiat. That is Congress' job. If Congress wants wrongful imprisonment judgments and settlements to be free of income tax, then Congress should amend section 104. If tax practioners and theoreticians, whether of the conservative, moderate, or liberal stripe, want judgments and settlements from wrongful imprisonment to be excluded from gross income, they should take their case to the legislature, not the IRS and not the courts. It never fails to amaze me when conservatives continually bash "overbearing bureaucrats" and "activist judges" for "creating" new law--except when conservatives don't like the old law.

Posted by: Publius Novus | Dec 15, 2011 7:08:29 AM