Insurance payment: pain & suffering

None unless the law is ambigious. The law in this case is not ambigious. It clearly states that payments for physical injury or illness are excluded. Then there is a period. After that there is nothing to indicate there is any qualification or limitation on that plain statement. No one who proposes making life more complicated for the OP has come up with a citation that imposes a limitation or qualification on that plain statement.

All the conference report does is make it clear that the clear meaning of the law is what the law clearly states.

In addition to Bill's reply, under some circumstances a taxpayer may be facing the penalty for a substantial understatement of income. To avoid the penalty, the taxpayer has to show substantial authority for his position. Substantial authority for this purpose, includes Committee Reports.

In addition, when the law may be unclear or there is new legislation, the courts will also look at the Blue Book (General Explanation of Tax Legislation) as well as Committee Reports to ascertain Congressional intent. Blue Books are published by the Joint Committee on Taxation for either a Congress, Congressional Session or year. Since 1998, they have been published for a Congress. The last one published was for the 110th Congress.

I'm still not convinced that it should be tax free.

But I am convinced that you should definitely treat vicarious emotional distress damages as tax free unless there is more persuasive authority to the contrary.

The law section 104 does not have the words "third party" or "consortium" in it. The conference report does. Who exactly wrote this conference report?

HR 3448 of the 104th Congress was passed by the House. The Senate passed an amended version of the bill. When that happens, the two Houses form a joint conference committee made up of members of both Houses. Upon coming to an agreement, they publish the Conference Report. The report contains an explanation of the provisions in the revised bill. The revised HR 3448 that came out of the Conference Committee was then passed by both Houses and signed by the President and became Public Law 104-188.

I should have included the actual wording in the report. Here it is:

House bill

Include in income all punitive damages

The House bill provides that the exclusion from gross income does not apply to any punitive damages received on account of personal injury or sickness whether or not related to a physical injury or physical sickness. Under the House bill, present law continues to apply to punitive damages received in a wrongful death action if the applicable State law (as in effect on September 13, 1995 without regard to subsequent modification) provides, or has been construed to provide by a court decision issued on or before such date, that only punitive damages may be awarded in a wrongful death action. No inference is intended as to the application of the exclusion to punitive damages prior to the effective date of the House bill in connection with a case involving a physical injury or physical sickness.

Include in income damage recoveries for nonphysical injuries

The House bill provides that the exclusion from gross income only applies to damages received on account of a personal physical injury or physical sickness. If an action has its origin in a physical injury or physical sickness, then all damages (other than punitive damages) that flow therefrom are treated as payments received on account of physical injury or physical sickness whether or not the recipient of the damages is the injured party. For example, damages (other than punitive damages) received by an individual on account of a claim for loss of consortium due to the physical injury or physical sickness of such individual's spouse are excludable from gross income. In addition, damages (other than punitive damages) received on account of a claim of wrongful death continue to be excludable from taxable income as under present law.

The House bill also specifically provides that emotional distress is not considered a physical injury or physical sickness. 56

[Footnote] Thus, the exclusion from gross income does not apply to any damages received (other than for medical expenses as discussed below) based on a claim of employment discrimination or injury to reputation accompanied by a claim of emotional distress. Because all damages received on account of physical injury or physical sickness are excludable from gross income, the exclusion from gross income applies to any damages received based on a claim of emotional distress that is attributable to a physical injury or physical sickness. In addition, the exclusion from gross income specifically applies to the amount of damages received that is not in excess of the amount paid for medical care attributable to emotional distress. [Footnote 56: It is intended that the term emotional distress includes symptoms (e.g., insomnia, headaches, stomach disorders) which may result from such emotional distress.]

No inference is intended as to the application of the exclusion to damages prior to the effective date of the House bill in connection with a case not involving a physical injury or physical sickness.

Effective date.--The provisions generally are effective with respect to amounts received after June 30, 1996. The provisions do not apply to amounts received under a written binding agreement, court decree, or mediation award in effect on (or issued on or before) September 13, 1995.

Senate amendment

Include in income all punitive damages

The Senate amendment is the same as the House bill.

Include in income damage recoveries for nonphysical injuries

No provision.

Conference agreement

Include in income all punitive damages

The conference agreement follows the House bill and the Senate amendment.

Include in income damage recoveries for nonphysical injuries

The conference agreement follows the House bill.

Effective date.--The provisions generally are effective with respect to amounts received after date of enactment. The provisions do not apply to amounts received under a written binding agreement, court decree, or mediation award in effect on (or issued on or before) September 13, 1995.

Thank you, Alan, for establishing beyond reasonable doubt that the clearly stated law does, indeed, clearly mean what it clearly says.Settlements and court awards paid for physical injury are excluded from taxation.

If Congress had wanted tax exclusion limited to the injured party, the law would say so. Since Congress did not put any such limit in the law, there is no such limit.

:)

Sorry to go on, but what had concerned me, coming to think of it, is:

(1) The conference report has "©2005 Davis, Malm & D?Agostine, P.C." on it, which makes it sound like the opinion of a law firm.

(2) The URL of the conference report was

If it started with irs.gov, treasury.gov, house.gov, etc maybe it would be OK.

I posted the actual conference report in this section of the thread.

Thanks to all who replied and commented on this topic. I now have enough general background information to ask the tax CPA relevant questions.

The past few months have been a horror for my wife and I. We appreciate the help you have given by replying and commenting.