Federal Tax

Tax Aspects of Settlements and Judgments (Portfolio 522)

  • This Portfolio examines the tax consequences to payor and payee following a settlement or judgment and analyzes the tax issues of personal injury and non-personal injury lawsuits.


Bloomberg Tax Portfolio No. 522, Tax Aspects of Settlements and Judgments, examines the tax consequences to both payor and payee pursuant to a settlement or judgment. It analyzes the tax issues that arise in personal injury lawsuits as well as non-personal injury lawsuits. In the personal injury context, prior law and the rules in effect after the amendment of §104(a)(2) by the Small Business Job Protection Act of 1996 are discussed in detail.

Payments pursuant to a settlement or judgment give rise to tax consequences to both payor and payee. This portfolio examines the includibility of payments pursuant to settlements and judgments, as well as the deductibility and reporting of those payments. Specifically, this Portfolio examines planning techniques which may be undertaken to enhance the tax results for both plaintiffs and defendants, as well as those who are only considering litigation. A wide array of substantive litigation is considered in this portfolio, including the tax aspects of personal physical injury cases, various types of employment-related claims, business recoveries and liabilities, structured settlements, marital dissolutions, and antitrust payments and recoveries. The tax treatment of legal fees is also examined.

Special emphasis is placed on issues relating to the allocation of a lump sum awarded in a judgment or a settlement between several claims made by a plaintiff. In addition, special rules governing structured settlements are analyzed in detail. The tax treatment of attorneys’ fees is discussed in detail, including the enactment of the American Jobs Creation Act of 2004 and the Supreme Court decision in Comr. v. Banks and Comr. v. Banaitis, both of which attempt to resolve the acidic split in the Circuit Courts of Appeals which existed with respect to this issue.

Table of Contents

I. Introduction
II. Origin of Claim Test
III. Amounts Received on Account of Personal Injuries Or Sickness
IV. Non-Personal Injury Cases
V. Payor’s Deduction of Payments
VI. Structured Settlements
VII. Substantiating Tax Treatment

Robert Wood
Managing Partner
Wood LLP
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