Money Monk - good luck decrypting the statutory law for your area without relying on case law, as Cathy has suggested.
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.
As for the rest of your post, although it appears to contain a gratuitous insult, I am not sure why you posted it. The information in my post is accurate and you have not identified any inaccuracy. US law on this topic is a bit different from Canadian law, although it works out the same in many but not all cases. Specifically, the US framework is exactly what I already said: the general principle is that the entire damage award or settlement is taxable, unless you can identify a statutory exception. The most common exception for these facts is the one I mentioned in my post. This is exactly how the issue is framed in the cases. For example, see the discussion in
Banks v. Commissioner,
TC Memo 2001-48:
| 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).
|
The Court presumably uses the term "settlement proceeds" to make it clear that this analysis applies to the entire amount (not just the portion that would be income under Canadian tax principles). You will notice that those are the exact same two provisions I cited: the general rule (§ 61(a)) and an exception thereto (§ 104(a)(2)). The Court was a bit imprecise and overly broad in that quote, but it illustrates the general idea that the entire proceeds are taxable unless a statutory exception is identified. See my post above for a more precise statement. Incidentally, that's another reason to read the statute first: you'll know when the judge is incorrectly paraphrasing it.
The results under the US scheme sometimes overlap with Canada but they sometimes do not. I myself have occasionally mentally confused the laws of the two countries. However, they aren't always the same.
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.
In summary, my post correctly answered all the major questions in the OP, while inviting him to do further research to find the answers applicable to the specific facts of his case. I'd say it was a solid post.
I should also comment on your use of the term "common law" in your suggestion that since Canada is a common law country, legal research should start with the cases rather than the statute. The term "common law" has many different meanings, and it is not clear which one you meant. I previously mused on this in an earlier
essay on common law marriage.
In this situation, the tax system is a "common law" system in the sense that the decisions of judges may have a binding effect such that one needs to read the case law to learn the entire law. However, the tax system is
not a common law system in the way that, say, contract law in Canada is. In Canadian contract law, all of the rules originate from the cases: there is no statute being interpreted (for the most part).
However, the sole authority for the collection of taxes is a statute or a collection of statutes. In both Canada and the USA, the government cannot levy a tax unless it has been authorised by statute. In that sense, the tax system is a "positive law" system rather than a pure "common law" system. In such a positive law system, you would be remiss not to start from the first principles contained in the statute. Trying to piece together the various conclusions of the case law without a good understanding of the statutory basis for them can lead to very significant misunderstandings, and is something that I have seen lead many people astray in legal research.
I have also written elsewhere about
the legal basis for income tax rules in the USA, together with
a brief comment of the role of court decisions in tax administration. My intent with some of these posts is to provide people with the tools they need to carry out research themselves in the future. I believe I've actually had some success as some users have started citing statutes where they did not do so before.
In my opinion, society is enhanced when people understand the legal basis for their system of government and social relations. I like to think my posts are helping with that, in whatever trivial way posts on a small forum can do so.