Dude, you only gave 90 minutes to reply between your two posts. I'm not inspired to do significant research for this question, but here's the first principle you should know of legal research: you should look at the statutory framework before trying to understand the case law.
In this case, the general principle is that all income "from whatever source derived" is taxable: 26 USC § 61(a). Unless you can identify a statutory basis for excluding your settlement from income, it is going to be taxable.
One possible basis could be 26 USC § 104(a)(2), which excludes from income compensatory damages (not punitive damages) received "on account of personal physical injuries or physical sickness". Damages for emotional distress explicitly do not count other than damages paid for medical care to treat emotional distress.
So let's just review the above. The general principle is that the income is taxable. To avoid that result, you need to identify a statute that makes it nontaxable. If you want to rely on 26 USC § 104(a)(2), you need to show that your settlement or a portion thereof (1) consists of compensatory damages, not punitive damages, and (2) was received on account of personal physical injuries. Only the portion that actually meets the requirements will be nontaxable under that statute.
It's very possible that a claim for false arrest could involve compensation for a personal physical injury. However, that may only be a portion of the damages. A shrewd lawyer would have drafted the formal consent judgment (or other settlement document) to explicitly demarcate the damages that were being awarded as compensation for personal physical injury. That way you would have a rock solid tax argument simply by producing the signed formal judgment. Assuming that was not done here, you may be in for more fun.
You should understand that the specific basis in tort law for the claim or claims is not what is relevant for 26 USC § 104(a)(2).
Good luck.
Money Monk - good luck decrypting the statutory law for your area without relying on case law, as Cathy has suggested.
We must decide whether petitioner received any of the settlement proceeds on account of a personal injury. To the extent that he did, the funds are excludable from his gross income. See sec. 104(a)(2). To the extent that he did not, the funds are includable in his gross income. See sec. 61(a). |
Where it gets weird is there seems to be a gray area that hasn't been addressed with cases that aren't explicit either way (doesn't outline specific physical damages, but doesn't specify that they were non-existent either).
I didn't suggest not reading the case law. I suggested reading the statute first so that you understand what the cases are discussing. I stand by that suggestion for all areas of law governed by statute. In particular, that allows you to focus your search through the case law to cases that are relevant. It also allows you to know what cases are irrelevant due to intervening legislative changes. In particular, the Internal Revenue Code used to be more generous on this topic, but was relatively recently (1996) amended to include more compensatory damages in income. Cases decided before that date may contain propositions of law that are no longer accurate. You wouldn't know that without reading the statute first.
In OP's case, the key issue is going to be what proportion of the funds in the settlement or judgment constituted money received on account of personal physical injury (which are probably nontaxable), and what proportion constituted money received on account of emotional distress or for other things (which are probably taxable unless a different exception can be identified). OP seemed to be operating under the assumption that the entire settlement would be one or the other, but that is not necessarily the case.
Furthermore, OP seemed to be unclear on whether the default result was that the proceeds were taxable or nontaxable. Specifically, OP says:Where it gets weird is there seems to be a gray area that hasn't been addressed with cases that aren't explicit either way (doesn't outline specific physical damages, but doesn't specify that they were non-existent either).
In other words, OP was unsure on what happens if the taxpayer is silent about whether the damages were awarded for a physical personal injury. I have answered that question: the default is that the proceeds are taxable in their entirety. To avoid that result, OP needs to bring himself within an affirmative exception, as explained in my post.
I can't top our resident legal expert Cathy above, but I'm curious to know what the OP was falsely arrested for.
If my initial complaint alleges physical and emotional damages, and we settle out of court, there isn't necessarily anything that is going to outline what % of the settlement is supposedly from physical damages and what is from emotional, is there? I couldn't find any instances where that situation was been dealt with as a tax issue, so I was asking if anyone did.
I already knew (and said as much) that physical damage settlements are exempt from income, and emotional arent. What I m trying to figure out is if I get a check for $10K and it says "for physical an demotional damages" what is my tax burden?
If my initial complaint alleges physical and emotional damages, and we settle out of court, there isn't necessarily anything that is going to outline what % of the settlement is supposedly from physical damages and what is from emotional, is there? I couldn't find any instances where that situation was been dealt with as a tax issue, so I was asking if anyone did.
I already knew (and said as much) that physical damage settlements are exempt from income, and emotional arent. What I m trying to figure out is if I get a check for $10K and it says "for physical an demotional damages" what is my tax burden?
I don't misunderstand your post, although I don't know what kind of answer you are looking for here. Do you expect us to write a legal brief for you that you can use in your argument of why your settlement is nontaxable? Until your most recent post, you didn't even tell us the facts of the case, and even your most recent post is rather vague as to what kind of damages you may have suffered. You also expected the brief within 90 minutes. This is normally a service you would pay a significant amount for.
If there's nothing that outlines what the damages are for, you're going to have to construct a convincing argument yourself. It might help if you can quantify the portion of the damages that would be nontaxable and then compare that to the amount of settlement. There's not a whole lot else we can say here. If you don't know how to come up with an argument, you will have to retain counsel.
The specific facts of my case are mostly irrelevant to this issue.
I very clearly simply asked if anyone knew of a situation similar to what I described: Where damages where awarded but nothing specifies how much are for physical and how much are for emotional.
Money Monk, why are you being so hostile to someone who is trying to help you? Not a winning strategy in life. If you don't like the help provided, a better approach might be to just ignore it.
I suggest you ask a tax professional. If the amount is at all significant, it seems like it would be worth a small fee to have some professional advice on this.
The facts of your case are obviously highly relevant. If you don't understand why, you may want to read the posts that have already been made.
Here, again, is the answer: You will have to come up with an argument that shows that some portion is nontaxable, if you want some portion to be nontaxable.
I am no longer inclined to offer any further assistance given that your most recent post is filled with insults and you clearly have no respect for the free help that has been provided to you in the thread.
If you were to consult with an attorney or a CPA, they likely have a paid subscription to a legal database to research tax cases. It's probably prudent to pull a few cases before you sign any papers and get some advice.
The truth is that you're highly unlikely to get a lot of advice on this. You're dealing with a complicated legal/tax question for which we don't have all of the details. You are specifically asking for tax avoidance advice regarding a "grey area" and most professionals aren't going to be willing to dive too far into pulling case law when you aren't their client!
If you're truly interested in having someone pull cases for you, I would suggest posting a job on Elance - you can usually find someone with access to a legal database who will do that for relatively cheaply.
And for the record, I am not trying to avoid paying any taxes that I owe, I just want to find out what I DO owe.
And for the record, I am not trying to avoid paying any taxes that I owe, I just want to find out what I DO owe.
I know. Tax avoidance involves perfectly legal strategies to avoid tax liability - such as how to specifically phrase a settlement agreement, or what evidence you'd need to prove your physical damages for tax purposes.
Tax evasion would be avoiding paying taxes you owe!
Many tax cases are filed in the Tax Court, which publishes its opinions on its website. Cases can also be filed in District Court, and those opinions are also available online. Opinions rendered by a Court of Appeals are also online. Supreme Court opinions are also available online.
Databases like LexisNexis have some additional features such as allowing you to see the "treatment" of a case (whether it has been followed in subsequent cases). They also group the entire procedural history of an action together making it easy to view subsequent appeals in the same case. The commercial databases may also allow you to view the briefs filed by the parties, which can sometimes be helpful. If you want to see the briefs in a particular case, they are likely to be available on PACER for a nominal fee, which is waived if you spend below a certain threshold.
Overall, I don't think you will need access to a commercial database to do this research, but if you do want access to one, you may want to visit your local public library, or the library at a local courthouse, as they often have subscriptions available to the public (which I believe CPA CB suggested as well).
LexisNexis is a paid service, although if you had access as a student, your student account may still be active as they are not very reliable about deactivating them.
LexisNexis is a paid service, although if you had access as a student, your student account may still be active as they are not very reliable about deactivating them.
Lol man, i dunno. This was 12 years ago.