Case Law Concerning the Treatment of Federal Income Taxes in Personal Injury and Wrongful Death Litigation in the State Courts

According to the Internal Revenue Code, 26 U.S.C. § 104(a)(2), certain tort damage awards are made on a tax-advantaged basis, with no federal income taxes owed on ‘‘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.’’ Federal income taxes are thus not owed on receipt of court awards of compensatory damages in personal (physical) injury type cases nor for awards to statutory beneficiaries or an estate in cases involving wrongful death. The interest that accrues over time on the subsequent investment of any such award, however, would be subject to federal taxation, per 26 U.S.C. § 61(a).