There are various tax rules that govern injury and emotional distress court cases. Learn about important precedents below:

Legal Malpractice vs Physical Injury - The Ninth Circuit Court of Appeals agreed with the Tax Court that payments for legal malpractice in mishandling a physical injury suit are taxable to the recipient, as the settlement was entered to compensate the plaintiff for the harm caused by the malpractice, rather than for the physical injuries sustained in the underlying negligence action. (Blum v. Commissioner, 2022-1170)

Emotional Distress - Tax Court concluded that damages paid to a sales representative who was terminated because he could not make in-person calls following a heart attack were taxable, as the payment was not for physical injury but was for emotional distress and otherwise as set forth in the complaint, as no physical injury arose or was worsened by the company's conduct. (Dern v. Commissioner, TC Memo 2022-90)