Yesterday, I posted that I predicted that the top tax news story of the year would be the privatization of collections efforts from IRS. I may have to eat my words. If a ruling made by the US Court of Appeals for the DC Circuit remains – and if other courts follow suit, a seemingly innocuous statement in that court will change the way that our trial system operates. Seriously.
You see, traditionally, damages for personal injuries have been tax exempt for purposes of federal income tax. However, money received for emotional distress and other intangible injuries has been taxable. As a result, there has been a real strategy among personal injury lawyers to direct as much of a plaintiff’s award towards the tangible injuries component as possible – until now.
The U.S. Court of Appeals for the DC Circuit has ruled that carving out an exemption for compensation for physical injuries but retaining a tax on intangible injuries is unconstitutional. The traditional thinking had been that the emotional distress element was more akin to punitive damages and was, effectively, a windfall to the plaintiff and should be taxed. The federal court in DC says differently. This is huge.
For now, this only applies to DC. It is, however, just a matter of time before attorneys in other jurisdictions make the same claims in federal court. By the end of the year, I believe we’ll be seeing talk of the case making it to the Supreme Court, which is rare by the way: tax cases rarely end up in the Supreme Court.
