Tax Treatment of Settlement


P

Paultry

Taxpayer, a municipal employee, sustained an on-the-job
injury in 2002. Taxpayer filed suit against the
municipality, asserting a claim for workman's comp benefits,
and a claim for retaliatory termination in violation of
state workman's comp law.

Taxpayer reached a settlement of his workman's comp benefit
claim and received payment of that claim directly from the
municipality's insurance carrier.

Taxpayer and the municipality agreed on a cash payment
amount to settle the retaliatory termination claim. Per the
settlement, the payment was made, "...solely in order to
compromise and purchase peace, to avoid the vexation and
expense of litigation, and does not and is not to constitute
an admission of any liability, but on the contrary is being
paid with the express understanding of the denial of any
liability."

Wording of the retaliatory termination claim settlement
indicates (to me) its payment did not represent punitive
damages.

Since the retaliatory termination claim had its origin in a
physical injury, does the settlement amount paid by the
municipality qualify as compensatory damages which enjoy the
IRC 104(a)(2) exclusion from gross income?
 
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A

Alan

Paultry said:
Taxpayer, a municipal employee, sustained an on-the-job injury in 2002.
Taxpayer filed suit against the municipality, asserting a claim for
workman's comp benefits, and a claim for retaliatory termination in
violation of state workman's comp law.

Taxpayer reached a settlement of his workman's comp benefit claim and
received payment of that claim directly from the municipality's
insurance carrier.

Taxpayer and the municipality agreed on a cash payment amount to settle
the retaliatory termination claim. Per the settlement, the payment was
made, "...solely in order to compromise and purchase peace, to avoid the
vexation and expense of litigation, and does not and is not to
constitute an admission of any liability, but on the contrary is being
paid with the express understanding of the denial of any liability."

Wording of the retaliatory termination claim settlement indicates (to
me) its payment did not represent punitive damages.

Since the retaliatory termination claim had its origin in a physical
injury, does the settlement amount paid by the municipality qualify as
compensatory damages which enjoy the IRC 104(a)(2) exclusion from gross
income?
I don't have a citation or case but I believe they are
independent of each other. One part deals with physical injury
and a workers comp claim. The other part deals with an employment
related claim. That would make the employment related payment
taxable. If there were legal fees and other costs involved, the
t/p would have to allocate those costs against the two revenue
streams to obtain the amount deductible (misc. itemized) for the
employment related claim.
 
D

D. Stussy

Paultry said:
Taxpayer, a municipal employee, sustained an on-the-job
injury in 2002. Taxpayer filed suit against the
municipality, asserting a claim for workman's comp benefits,
and a claim for retaliatory termination in violation of
state workman's comp law.

Taxpayer reached a settlement of his workman's comp benefit
claim and received payment of that claim directly from the
municipality's insurance carrier.

Taxpayer and the municipality agreed on a cash payment
amount to settle the retaliatory termination claim. Per the
settlement, the payment was made, "...solely in order to
compromise and purchase peace, to avoid the vexation and
expense of litigation, and does not and is not to constitute
an admission of any liability, but on the contrary is being
paid with the express understanding of the denial of any
liability."

Wording of the retaliatory termination claim settlement
indicates (to me) its payment did not represent punitive
damages.

Since the retaliatory termination claim had its origin in a
physical injury, does the settlement amount paid by the
municipality qualify as compensatory damages which enjoy the
IRC 104(a)(2) exclusion from gross income?
None of it is excludible. The settlement does NOT say that the amount is
for compensation for personal injuries nor does it allocate an amount to
such. In the absence of such, the courts have generally ruled that the
entire payment is taxable. Although the origin of ONE OF the claims is a
personal injury, the other was not (termination of employment), and
therefore without an allocation, the taxpayer is screwed. He should sue any
attorney who represented him for malpractice for not considering this.
 
G

Gil Faver

D. Stussy said:
None of it is excludible. The settlement does NOT say that the amount is
for compensation for personal injuries nor does it allocate an amount to
such. In the absence of such, the courts have generally ruled that the
entire payment is taxable. Although the origin of ONE OF the claims is a
personal injury, the other was not (termination of employment), and
therefore without an allocation, the taxpayer is screwed. He should sue
any
attorney who represented him for malpractice for not considering this.
and he should kick himself real hard for agreeing to a settlement without he
himself considering this angle.
 
P

Paultry

Gil said:
and he should kick himself real hard for agreeing to a settlement without he
himself considering this angle.
Harsh criticism of a blue collar worker who may deal with a
tax issue of this nature maybe once in his lifetime? I'm
sure he was confident that his lawyer, who took 40% of the
settlement, was looking out for the client's best interests.
 
D

D. Stussy

Paultry said:
Harsh criticism of a blue collar worker who may deal with a
tax issue of this nature maybe once in his lifetime? I'm
sure he was confident that his lawyer, who took 40% of the
settlement, was looking out for the client's best interests.

And why shouldn't the critizism be? Where you see confidence, I see
malpractice.
 
P

Paultry

D. Stussy said:
And why shouldn't the critizism be? Where you see confidence, I see
malpractice.
I have no quarrel with your malpractice assertion. I was
responding to Gil Faver's post which I felt was an
unwarranted criticism of the taxpayer ("he himself") for
agreeing to a settlement without considering the tax
consequences. I contend that a taxpayer with no education
or training in law or accounting should be able to have
confidence in and rely on the advice and counsel of his
attorney. I would hope that any licensed professional would
agree, else why retain same?
 
G

Gil Faver

Paultry said:
I have no quarrel with your malpractice assertion. I was responding to
Gil Faver's post which I felt was an unwarranted criticism of the taxpayer
("he himself") for agreeing to a settlement without considering the tax
consequences. I contend that a taxpayer with no education or training in
law or accounting should be able to have confidence in and rely on the
advice and counsel of his attorney. I would hope that any licensed
professional would agree, else why retain same?

I am of the opinion that NOBODY is wise if they think they can "have
confidence in and rely on the advice and counsel of his attorney". If this
guy had no reason to consider the tax implications, why is he doing so now?
Why didn't he just make an assumption, and file his taxes?

And, FWIW, my comments are made "by a licensed professional".

and, also, I see no reason why the attorney should not be held to a
malpractice claim on this matter, but I bet he cannot be, if that was not
his area of expertise.
 
S

Seth

None of it is excludible. The settlement does NOT say that the amount is
for compensation for personal injuries nor does it allocate an amount to
such.
Isn't the workman's comp payment, by definition, for compensation for
the personal injury?

Seth
 
B

Bill Brown

Isn't the workman's comp payment, by definition, for compensation for
the personal injury?
Workman's comp is excludible by statute.

**BEGIN QUOTE**
104(a) IN GENERAL. --

Except in the case of amounts attributable to (and not in excess of)
deductions allowed under section 213 (relating to medical, etc.,
expenses) for any prior taxable year, gross income does not include --

104(a)(1) amounts received under workmen's compensation acts as
compensation for personal injuries or sickness;
**END QUOTE**
 
D

D. Stussy

Seth said:
Isn't the workman's comp payment, by definition, for compensation for
the personal injury?
None of the amount paid is marked as workman's comp. Therefore, none of it
is.
 
S

Seth

None of the amount paid is marked as workman's comp. Therefore, none of it
is.
How do you reconcile that statement with the first quoted paragraph
above? Settlement of a workman's comp benefit claim is surely
workman's comp, is it not?

Seth
 
D

D. Stussy

Seth said:
How do you reconcile that statement with the first quoted paragraph
above? Settlement of a workman's comp benefit claim is surely
workman's comp, is it not?
I reconcile it easily. From the OP's post:

'... [T]he payment was made, "...solely in order to compromise and purchase
peace, to avoid the vexation and expense of litigation, and does not and is
not to constitute an admission of any liability, but on the contrary is
being paid with the express understanding of the denial of any liability."'

I don't see any mention that the payment is to satisfy any workman's
compensation claim. The payor is also specifically stating that they DENY
any such claim.
 
A

Alan

D. Stussy said:
Seth said:
How do you reconcile that statement with the first quoted paragraph
above? Settlement of a workman's comp benefit claim is surely
workman's comp, is it not?
I reconcile it easily. From the OP's post:

'... [T]he payment was made, "...solely in order to compromise and purchase
peace, to avoid the vexation and expense of litigation, and does not and is
not to constitute an admission of any liability, but on the contrary is
being paid with the express understanding of the denial of any liability."'

I don't see any mention that the payment is to satisfy any workman's
compensation claim. The payor is also specifically stating that they DENY
any such claim.
OP said:

"Taxpayer reached a settlement of his workman's comp benefit
claim and received payment of that claim directly from the
municipality's insurance carrier."

His next paragraph relating to the employment based claim said:

"Taxpayer and the municipality agreed on a cash payment amount to
settle the retaliatory termination claim. Per the settlement,
the payment was made, "...solely in order to compromise and
purchase peace, to avoid the vexation and expense of litigation,
and does not and is not to constitute an admission of any
liability, but on the contrary is being paid with the express
understanding of the denial of any liability."
 
D

D. Stussy

Alan said:
D. Stussy said:
Seth said:
Taxpayer reached a settlement of his workman's comp benefit
claim and received payment of that claim directly from the
municipality's insurance carrier.
None of it is excludible. The settlement does NOT say that the
amount
is
for compensation for personal injuries nor does it allocate an
amount
to
such.
Isn't the workman's comp payment, by definition, for compensation for
the personal injury?
None of the amount paid is marked as workman's comp. Therefore, none
of
it
is.
How do you reconcile that statement with the first quoted paragraph
above? Settlement of a workman's comp benefit claim is surely
workman's comp, is it not?
I reconcile it easily. From the OP's post:

'... [T]he payment was made, "...solely in order to compromise and purchase
peace, to avoid the vexation and expense of litigation, and does not and is
not to constitute an admission of any liability, but on the contrary is
being paid with the express understanding of the denial of any liability."'

I don't see any mention that the payment is to satisfy any workman's
compensation claim. The payor is also specifically stating that they DENY
any such claim.
OP said:

"Taxpayer reached a settlement of his workman's comp benefit
claim and received payment of that claim directly from the
municipality's insurance carrier."

His next paragraph relating to the employment based claim said:

"Taxpayer and the municipality agreed on a cash payment amount to
settle the retaliatory termination claim. Per the settlement,
the payment was made, "...solely in order to compromise and
purchase peace, to avoid the vexation and expense of litigation,
and does not and is not to constitute an admission of any
liability, but on the contrary is being paid with the express
understanding of the denial of any liability."
The settlement itself allocates ZERO to worker's comp (by omission). The
claim never matured but was agreed to be aborted WITHOUT regard to its
nature or origin. Note also the word "solely." That specifically excludes
all other reasons, even those in the originating claim.

You've been told how the courts (Tax Court and Court of Federal Claims) rule
on settlements that don't have any allocation of payments to any type of
excludible income. It's not my personal opinion. It's case law repeated ad
nauseum.
 
S

Stuart Bronstein

D. Stussy said:
The settlement itself allocates ZERO to worker's comp (by
omission). The claim never matured but was agreed to be aborted
WITHOUT regard to its nature or origin. Note also the word
"solely." That specifically excludes all other reasons, even
those in the originating claim.

You've been told how the courts (Tax Court and Court of Federal
Claims) rule on settlements that don't have any allocation of
payments to any type of excludible income. It's not my personal
opinion. It's case law repeated ad nauseum.
I believe that if the complaint had only one cause of action, and
recovery under that cause of action would not be taxable, no allocation
is required. But if there are causes of action some of which would
result in taxable income and some of which would result in non-taxable
income, failure to allocation would definitely be a problem.

Stu
 
A

Alan

D. Stussy said:
Alan said:
D. Stussy said:
Taxpayer reached a settlement of his workman's comp benefit
claim and received payment of that claim directly from the
municipality's insurance carrier.
None of it is excludible. The settlement does NOT say that the amount
is
for compensation for personal injuries nor does it allocate an amount
to
such.
Isn't the workman's comp payment, by definition, for compensation for
the personal injury?
None of the amount paid is marked as workman's comp. Therefore, none of
it
is.
How do you reconcile that statement with the first quoted paragraph
above? Settlement of a workman's comp benefit claim is surely
workman's comp, is it not?
I reconcile it easily. From the OP's post:

'... [T]he payment was made, "...solely in order to compromise and purchase
peace, to avoid the vexation and expense of litigation, and does not and is
not to constitute an admission of any liability, but on the contrary is
being paid with the express understanding of the denial of any liability."'
I don't see any mention that the payment is to satisfy any workman's
compensation claim. The payor is also specifically stating that they DENY
any such claim.
OP said:

"Taxpayer reached a settlement of his workman's comp benefit
claim and received payment of that claim directly from the
municipality's insurance carrier."

His next paragraph relating to the employment based claim said:

"Taxpayer and the municipality agreed on a cash payment amount to
settle the retaliatory termination claim. Per the settlement,
the payment was made, "...solely in order to compromise and
purchase peace, to avoid the vexation and expense of litigation,
and does not and is not to constitute an admission of any
liability, but on the contrary is being paid with the express
understanding of the denial of any liability."
The settlement itself allocates ZERO to worker's comp (by omission). The
claim never matured but was agreed to be aborted WITHOUT regard to its
nature or origin. Note also the word "solely." That specifically excludes
all other reasons, even those in the originating claim.

You've been told how the courts (Tax Court and Court of Federal Claims) rule
on settlements that don't have any allocation of payments to any type of
excludible income. It's not my personal opinion. It's case law repeated ad
nauseum.
I think I am still going to disagree with your conclusion. Tax
court decisions in Stocks (98 TC 1) and Metzger (88 TC 834) deal
with settlement agreements and allocations. In both instances
there was a single payment made to settle the plaintiffs claims.
These cases form the basis that one looks to the intent of the
payor in settling the claim. In both those cases, the court
divided the amount between the taxable and nontaxable pieces. In
this instance, we also have more than one claim. I.e., workers
compensation and retaliation. However, we do not have one payment
that has to be allocated. We have two payments. One payment made
by the employers insurance company for workers compensation and
one payment by the company for the retaliation claim. The
settlement agreements in both referenced cases made no mention of
or allocated any amount to the nontaxable part of the claim.

I have to conclude, that when one files a claim for workers comp
and receives payment from the WC insurance company to settle that
claim, you have excludable income. There is no need to make any
allocation in this instance and there is no requirement that any
settlement agreement state that the payment was or was not for
personal injury.

I see nothing in any tax court cases or appeals court cases that
require
 
A

Alan

Alan said:
D. Stussy said:
Alan said:
D. Stussy wrote:
Taxpayer reached a settlement of his workman's comp benefit
claim and received payment of that claim directly from the
municipality's insurance carrier.
None of it is excludible. The settlement does NOT say that the amount
is
for compensation for personal injuries nor does it allocate an amount
to
such.
Isn't the workman's comp payment, by definition, for compensation
for
the personal injury?
None of the amount paid is marked as workman's comp. Therefore, none of
it
is.
How do you reconcile that statement with the first quoted paragraph
above? Settlement of a workman's comp benefit claim is surely
workman's comp, is it not?
I reconcile it easily. From the OP's post:

'... [T]he payment was made, "...solely in order to compromise and purchase
peace, to avoid the vexation and expense of litigation, and does not
and is
not to constitute an admission of any liability, but on the contrary is
being paid with the express understanding of the denial of any liability."'
I don't see any mention that the payment is to satisfy any workman's
compensation claim. The payor is also specifically stating that they DENY
any such claim.

OP said:

"Taxpayer reached a settlement of his workman's comp benefit
claim and received payment of that claim directly from the
municipality's insurance carrier."

His next paragraph relating to the employment based claim said:

"Taxpayer and the municipality agreed on a cash payment amount to
settle the retaliatory termination claim. Per the settlement,
the payment was made, "...solely in order to compromise and
purchase peace, to avoid the vexation and expense of litigation,
and does not and is not to constitute an admission of any
liability, but on the contrary is being paid with the express
understanding of the denial of any liability."
The settlement itself allocates ZERO to worker's comp (by omission). The
claim never matured but was agreed to be aborted WITHOUT regard to its
nature or origin. Note also the word "solely." That specifically
excludes
all other reasons, even those in the originating claim.

You've been told how the courts (Tax Court and Court of Federal
Claims) rule
on settlements that don't have any allocation of payments to any type of
excludible income. It's not my personal opinion. It's case law
repeated ad
nauseum.
I think I am still going to disagree with your conclusion. Tax court
decisions in Stocks (98 TC 1) and Metzger (88 TC 834) deal with
settlement agreements and allocations. In both instances there was a
single payment made to settle the plaintiffs claims. These cases form
the basis that one looks to the intent of the payor in settling the
claim. In both those cases, the court divided the amount between the
taxable and nontaxable pieces. In this instance, we also have more than
one claim. I.e., workers compensation and retaliation. However, we do
not have one payment that has to be allocated. We have two payments. One
payment made by the employers insurance company for workers compensation
and one payment by the company for the retaliation claim. The settlement
agreements in both referenced cases made no mention of or allocated any
amount to the nontaxable part of the claim.

I have to conclude, that when one files a claim for workers comp and
receives payment from the WC insurance company to settle that claim, you
have excludable income. There is no need to make any allocation in this
instance and there is no requirement that any settlement agreement state
that the payment was or was not for personal injury.

I see nothing in any tax court cases or appeals court cases that require
The full last sentence should have been:
I see nothing in any tax court cases or appeals court cases that
require a settlement agreement to specifically identify the
personal injury amount in order for the taxpayer to exclude the
amount paid.
 
S

Stuart Bronstein

Alan said:
I think I am still going to disagree with your conclusion. Tax
court decisions in Stocks (98 TC 1) and Metzger (88 TC 834) deal
with settlement agreements and allocations. In both instances
there was a single payment made to settle the plaintiffs claims.
These cases form the basis that one looks to the intent of the
payor in settling the claim. In both those cases, the court
divided the amount between the taxable and nontaxable pieces. In
this instance, we also have more than one claim. I.e., workers
compensation and retaliation. However, we do not have one payment
that has to be allocated. We have two payments. One payment made
by the employers insurance company for workers compensation and
one payment by the company for the retaliation claim. The
settlement agreements in both referenced cases made no mention of
or allocated any amount to the nontaxable part of the claim.

I have to conclude, that when one files a claim for workers comp
and receives payment from the WC insurance company to settle that
claim, you have excludable income. There is no need to make any
allocation in this instance and there is no requirement that any
settlement agreement state that the payment was or was not for
personal injury.
I have to agree with your conclusion. There was a reasonable
allocation, though not in the settlement agreement, and it should be
honored.

Stu
 
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D

D. Stussy

Alan said:
D. Stussy said:
Alan said:
D. Stussy wrote:
Taxpayer reached a settlement of his workman's comp benefit
claim and received payment of that claim directly from the
municipality's insurance carrier.
None of it is excludible. The settlement does NOT say that the amount
is
for compensation for personal injuries nor does it allocate an amount
to
such.
Isn't the workman's comp payment, by definition, for compensation for
the personal injury?
None of the amount paid is marked as workman's comp. Therefore,
none
of
it
is.
How do you reconcile that statement with the first quoted paragraph
above? Settlement of a workman's comp benefit claim is surely
workman's comp, is it not?
I reconcile it easily. From the OP's post:

'... [T]he payment was made, "...solely in order to compromise and purchase
peace, to avoid the vexation and expense of litigation, and does not
and
is
not to constitute an admission of any liability, but on the contrary is
being paid with the express understanding of the denial of any liability."'
I don't see any mention that the payment is to satisfy any workman's
compensation claim. The payor is also specifically stating that they DENY
any such claim.

OP said:

"Taxpayer reached a settlement of his workman's comp benefit
claim and received payment of that claim directly from the
municipality's insurance carrier."

His next paragraph relating to the employment based claim said:

"Taxpayer and the municipality agreed on a cash payment amount to
settle the retaliatory termination claim. Per the settlement,
the payment was made, "...solely in order to compromise and
purchase peace, to avoid the vexation and expense of litigation,
and does not and is not to constitute an admission of any
liability, but on the contrary is being paid with the express
understanding of the denial of any liability."
The settlement itself allocates ZERO to worker's comp (by omission). The
claim never matured but was agreed to be aborted WITHOUT regard to its
nature or origin. Note also the word "solely." That specifically excludes
all other reasons, even those in the originating claim.

You've been told how the courts (Tax Court and Court of Federal Claims) rule
on settlements that don't have any allocation of payments to any type of
excludible income. It's not my personal opinion. It's case law repeated ad
nauseum.
I think I am still going to disagree with your conclusion. Tax
court decisions in Stocks (98 TC 1) and Metzger (88 TC 834) deal
with settlement agreements and allocations. In both instances
there was a single payment made to settle the plaintiffs claims.
These cases form the basis that one looks to the intent of the
payor in settling the claim. In both those cases, the court
divided the amount between the taxable and nontaxable pieces. In
this instance, we also have more than one claim. I.e., workers
compensation and retaliation. However, we do not have one payment
that has to be allocated. We have two payments. One payment made
by the employers insurance company for workers compensation and
one payment by the company for the retaliation claim. The
settlement agreements in both referenced cases made no mention of
or allocated any amount to the nontaxable part of the claim.

I have to conclude, that when one files a claim for workers comp
and receives payment from the WC insurance company to settle that
claim, you have excludable income. There is no need to make any
allocation in this instance and there is no requirement that any
settlement agreement state that the payment was or was not for
personal injury.

I see nothing in any tax court cases or appeals court cases that
require
The OP stated that there were TWO causes of action:
- the injury (a workman's comp claim)
- wrongful termination.

Amounts paid for the wrongful termination are in lieu of [lost future]
income and are fully taxable.

An allocation needs to be made, and without an allocation, it is all
taxable.
 

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