Dern Reminds That Settlement Language Is Important In Section 104(a)(2) Physical Injury Cases

Dern Reminds that Settlement Language is Important in Section 104(a)(2) Physical Injury Cases

Taxpayers initiate lawsuits for a variety of reasons. For example, a taxpayer may bring a lawsuit against a defendant for breach of contract, personal negligence, defamation, or for a litany of other claims. Believe it or not—these individualized claims have significance for federal income tax purposes.

As a general matter, lawsuit recoveries (whether through judgment or settlement) are deemed fully taxable to the recipient. Indeed, there is a presumption under well-established federal case law that the receipt of a damage recovery is taxable. The taxpayer must therefore rebut the presumption and demonstrate that, for one reason or another, the recovery is not taxable.