I know compensation for injury is not taxable and punative damages are. However, a lawyer mishandled a case for personal injury and the victim won a malpractice suit against him. I keep thinking some, if not all, is a substitute for what he should have received for injury. I can't find malpractice in the list of taxable vs non-taxable settlements. Nan, EA in LA
Does the malpractice verdict allocate damages recovered between the different types of damages that were being sued for? I think your instinct is correct - the type of damages will relate back to the original case. What was recovered in the malpractice case should have the same effect as if it had been recovered in the original case. Stu
I've been dealing with a whistle blower case But I think the issues are similar I found a case last yr called Murphy, where the taxpayer did not have to include the damages in income But that case was vacated (Jan?) & will be re-done I think the implications can be huge
So stay tuned
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Agree -- if you can tie the settlement back to the original event it should retain the character of that event. This seems to me to be similar to a legal settlement against a financial manager, for example, for breach of fiduciary duty to a client resulting in a capital loss. The recovery would be a capital gain to offset against the loss carryover, rather than ordinary income. The part of the settlement that goes to attorney's fees is ordinary income to be included on line 21 of form 1040, partially offset by a miscellaneous deduction on schedule A subject to 2% AGI floor. The Murphy case, referred to in another reply, had to do with non-physical injury rather than physical injury. That is a different matter, AFAIK, and is still being litigated.
-Mark Bole
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