Q: Does a recent court decision mean that jury awards for "pain and suffering/emotional distress" are now not taxable?
óJ.C.D., Lafayette, Colo.
A:No. Here is a recap of two cases that apply.
In the first case, Marrita Murphy argued that an award she had received for emotional distress and loss of reputation was nontaxable. She lost. A federal appeals court panel decided that Congress has the power to tax awards received for personal, nonphysical injuries.
Ms. Murphy appealed to the Supreme Court, but it declined to take the case.
In the new case, the issue was whether a payment of about $28,000 that a former U.S. Air Force officer had received under a class-action settlement in 2004 could be excluded from income. No, said U.S. Tax Court Judge L. Paige Marvel. She said the payment was indeed taxable.
The taxpayer had argued that the payment wasn't really "income" and thus shouldn't be taxable. The gist of the argument: There was no "accession to wealth," and the money was intended to make him "whole" for his losses -- which, in addition to loss of wages, consisted of "lost promotional opportunities, lost military pension, damage to reputation and stigma of involuntary separation." The judge pointed out that the payment wasn't compensation for physical injuries or physical sickness.
In her opinion, Judge Marvel cited the Murphy case and said she agreed with the appeals-court decision. The judge also rejected other arguments made by the taxpayer.