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[P232]Personal Injury Settlement Taxable

by Elizabeth A Moreno, Eli

The U.S. Appeals Court for the D.C. Circuit shocked the tax world with its initial Murphy decision, in which it ruled that damages awarded a whistleblower were not taxable under the Constitution. Murphy filed a complaint with the Department of Labor alleging that her former employer, the New York Air National Guard (NYANG), in violation of various whistle-blower statutes, had "blacklisted" her and provided unfavorable references to potential employers after she had complained to state authorities of environmental hazards on a NYANG airbase. The Secretary of Labor determined the NYANG had unlawfully discriminated and retaliated against Murphy. Murphy submitted evidence that she had suffered both mental and physical injuries as a result of the NYANG's blacklisting her. Upon finding Murphy had also suffered from other "physical manifestations of stress" including "anxiety attacks, shortness of breath, and dizziness," the ALJ recommended compensatory damages totaling $70,000, of which $45,000 was for "emotional distress or mental anguish," and $25,000 was for "injury to professional reputation" from having been blacklisted. None of the award was for lost wages or diminished earning capacity.

Surprisingly, the three-judge U. S. Appeals Court for the D. C. Circuit quietly withdrew its original decision and issued a more conventional ruling holding that the whistleblower damages were taxable. The Court adopted the IRS's baseless argument. The IRS urged the Court to treat damages to people differently from damages to property. The IRS contended that compensation awarded to a person for the loss of an arm or a leg was not payment to make a person "whole" but was payment obtained as part of a "forced sale" In other words, if a person suffered a mental breakdown after witnessing her/his child being murdered, payment for that mental breakdown was taxable - as the victim (according to the IRS) simply was "forced" to sell his or her mental health, and obtained "income" based on the forced sale theory.

In a remarkable reversal of its prior decision, the Court adopted this baseless argument. The Court held that "Murphy's situation seems akin to an involuntary conversion of assets; she was forced to surrender some part of her mental health and reputation in return for monetary damages." As a result of the U. S, Supreme Court's rejection of Murphy's appeal, plaintiffs must pay taxes on compensatory damages for emotional distress or loss of reputation, if those damages are caused by employment discrimination or retaliation. The court has reasoned that the original harm is not personal injury but is akin to the taking of property and therefore is taxable. Plaintiff's attorneys cannot argue in an employment case that the settlement agreement should state that a portion of damages be considered 'personal injury or emotional distress' in order to escape the tax man. That argument will no longer work with Big Brother IRS.

After a serious injury, you may find yourself in financial trouble due to all of your medical bills and the fact that you haven't been able to work. If this is the case, you should hire an injury lawyer as soon as possible, so you can get the wheels turning on your settlement. There will usually be several weeks to several months that pass before you see any money from your case. Here is an overview of how the injury settlement process works.

First of all, you must find an injury attorney to represent you. This means you will need to set up an initial consultation. Even if you already have a general attorney on retainer, it is a good idea to use a specialist to represent you in an injury case.

When you have met with a few lawyers and decided which injury lawyer you want to use, make sure you understand the financial terms completely before you sign any paperwork. Your injury lawyer will probably work on a contingency fee, but be sure to find out if you will be responsible for any fees in the event the lawyer loses your case.

Once your lawyer has agreed to represent you, he must begin gathering information on the events and put together a solid case. He must prove the other party was at fault and review your medical records as well as any police reports that were filed. He may conduct witness interviews.

When your injury lawyer feels confident of his case, he will notify the responsible party about your intentions to sue for compensation. To avoid a lawsuit, the party may agree to enter talks to reach a settlement. The legal team on the other side is then given time to do their own investigation. This process can take several more weeks.

When the responsible party acknowledges they are at fault and agrees to work out a compensation amount, negotiations begin. This is usually a long drawn out process, as the other side will work to pay out as little as they can. Negotiating must follow certain protocols and procedures involving offers and counteroffers.

If the other party refuses to acknowledge blame or if the two legal teams cannot reach an agreement on the settlement amount, your injury lawyer will take your case to court. If your injury case goes to trial, it may be several more months, or even years until your injury case is settled and you see any money.

Catastrophic injury cases require more extensive preparation for trial and require more expert witnesses, which lengthens the process and escalates the expenses. When the trial has concluded and a verdict is reached, then you must settle payment with your injury lawyer. If your case is successful, your law firm will take a certain percentage, usually 33%, from your award. If your case is lost, you may or may not be required to pay your lawyer for expenses according to your initial agreement.

Collecting on an injury is a long drawn out process. You usually won't see any money for quite some time. It is always your choice, not the choice of your injury lawyer, whether you accept a settlement offer. You may decide to take a lower amount just so you can get your money quicker and avoid a lengthy trial.

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Both Elizabeth A Moreno & Andrew Long are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

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