Getting a Rule Right and Writing a Wrong Rule: The IRS Demands a Return on All Punitive Damages

Abstract

This article focuses on the Internal Revenue Service’s view of punitive damages received in personal injury litigation as non-taxable. In 1984, the IRS ruling (based on a 1975 revenue ruling) was reversed. The author explains what the 1975 ruling really meant, why that rule was correct, and why the 1984 ruling is based on a correct principle but is incorrect in its particulars. The thesis of this article is that, although punitive damages ought always be taxable, not every award that is legitimately described as punitive or that is intimately connected to the culpability of the tortfeasor is the kind of punitive damages that ought to be taxable.

Keywords: IRS, punitive damages, personal injury litigation, taxable