==========End Quote================== My point is that the payment is based on a claim attributable to the physical injury and death of their son. It is not taxable.
You can find the JCT document at
What if the payments were made to the son's estate?
Seth
See my latest reply to Art Kamlet's post. Payments for emotional distress are tax -free if they stem from physical injury. The courts have always and continue to construe section 104(a) to be applicable to surviving family members when the claim derives from the wrongful death of another family member.
Do you have a cite for such a court case?
Unfortunately the cited text did not state whose physical injury it is talking about.
I would argue the term personal physical injury excludes emotional distress inflicted on another person, whether that other person be a parent or a child or a neighbor, or a perfect stranger with an aptitude for litigious activities.
Absent cited text to the conrary, I await proof that "atributable to a physical injury or personal sickness" is intended to mean a neighbor or relative or anyone other than the person suffering the personal physical injury or emotional distress.
The next step is agreeing that that a claim paid to the one who suffered personal physical injury or his estate is not taxable.
So if the payment was made to a stranger who witnessed a fatal accident and claimed emotional distress, would you argue that payment is not taxable since someone did suffer personal physical injury?
Not taxable.
Kovacs vs Comm'r, 100 TC 124 (affirmed by the 6th Circuit 1994,
74 AFTR2d Para. 94-5001). Only the interest was includable in gross income by the surviving widow and children in a wrongful death claim.
See my reply to snipped-for-privacy@yahoo.com. The courts have always construed section 104(a) to include surviving family members. Kovacs vs Comm'r.
Alan is correct. I am correct. Thanks to Alan for providing a recent cite (even though the portion of 103 the Supremes dealt with in my cite didn't change which makes that case continue to be relevant today).
That would be my interpretation. I did some looking around and found no court cases dealing with the issue.
If you take the statute literally, Alan seems right. The statute says in relevant part that the following is not included in taxable income:
"the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness;..."
If I were with the IRS I'd take the position that to be excluded, the personal injuries that caused the emotional distress have to be for the same person. Otherwise the exceptions might swallow the rule.
However the statute doesn't say that. I don't know the IRS position. And it might well be reasonable to excluded those damages from income unless there is more certain authority that would disallow it.
That case also was decided under the old version of §104, that permitted any award for personal injuries to be excluded from income. This had been interpreted by the courts to include all claims for emotional distress.
As a result, it is not authority for personal injury treatment of vicarious emotional distress, since at that time all emotional distress was treated as personal injury.
Again, Kovacs was decided under the former version of §104, so it is not precedent for anything concering vicarious emotional distress. I have been unable to find any cases dealing with the present version of the statute.
,
So wouldn't that be the simplest way to handle it?
Seth
Sure, but ...
OP stated this was to compensate parentss for their own damages. That would preclude paying the estate.
It is very possible insurance company or OP misunderstood who was being compensated, but re-read OP's statment to understand where I'm coming from.
Some states don't allow pain and suffering damages for people who have died.
On Sat, 3 Oct 2009 16:03:40 EDT, snipped-for-privacy@panix.com (Arthur Kamlet) wrote Re Re: Insurance payment: pain & suffering:
That was indeed what I (the OP) wrote. However, from what I'm reading here, I am beginning to believe that to eliminate taxes we might:
1) request reimbursement be made to our son's estate for the estate's out-of-pocket un-deducted medical and funeral expenses 2) any payments beyond (1) be made to our son's estate for *his* pain & suffering during the two weeks he was in the hospital prior to his passingThinking back to the conversation I had with the insurance company, it wasn't stated who was being compensated for the P&S. I just assumed it would be us (his parents), but they may well have been referring to the estate. I'll clarify that when I speak to them again.
Does this seem reasonable?
Good plan.
Yes. Just be sure that it's in writing, approved by the court as a judgment. Otherwise the IRS might try to re-allocate the funds.
Unneccessary, therefore not reasonable.
Alan and I are not the only tax professionals who believe that even if paid directly to the parents, such amounts are excluded from federal income taxes.
"The legislative history (H.R. Conf. Rep. No. 737,100 Cong., 2d Sess.
301 (1996)) provides some guidelines for applying the limitation. In general, it looks to whether the primary injury is physical. If so, all resultant damages (except punitive damages) are excludable. Damages for emotional distress, for example, are excludable if the emotional distress was caused by or resulted from a physical injury. ... In an important concession, the Conference Report provides that resulting injuries to third parties, such as loss of consortium, are excluded if the primary injury was physical. (Id.) Similarly, recoveries for wrongful death are excluded." [Source:There is this:
"Wrongful Death Claims for wrongful death usually encompass compensatory damages for physical and mental injury, as well as punitive damages for reckless, malicious, or reprehensible conduct. As a result, both claims may generate settlement amounts. Any amounts determined to be compensatory for the personal injuries are excludable from gross income under IRC section 104(a)(2). " [AUDIT TECHNIQUE GUIDE FOR LAWSUITS AWARDS AND SETTLEMENTS,Internal Revenue Service, November 2000]
Well, there are at least two of us that are convinced that the payment is tax-free.
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