Whistleblower Award Taxable

The United States Court Of Appeals for the 5th Circuit has ruled that a whistleblower who accepted a settlement for his claims, including $3.5 million in “additional damages,” can’t exclude that amount from his income as compensation for personal injuries. He case is Green v. Commissioner, U.S. Court of Appeals, 5th Circuit No. 06-60597. Nov. 7, 2007.
The taxpayer received the money in settling a retaliation lawsuit against a state department from which he was fired. A jury had awarded him $3.4 million in compensatory damages and $10 million in punitive damages. After many attempts top collect the judgment from the state failed, the suit finally settled. The plaintiff then attempted to exclude $3.5 million designated as “additional damages” from his taxable income.
The IRS countered that the “additional damages” were not damages received on account of personal injury or sickness, and therefore were taxable income.
Acknowledging the claims underlying the plaintiff’s claims were tort-like, the Court nevertheless agreed with the IRS. “Ultimately, the character of the payment hinges on the payor’s dominant reason for making the payment,” the court held. ” The “amount of compensatory damages awarded by the jury in the whistleblower lawsuit for the loss of earning capacity and past and future mental anguish and suffering, [$3.5 million], mirrored exactly the amount of compensatory damages paid under … the settlement agreement. The logical import, then, is that the remainder of the settlement, including the amounts paid under [the “additional damages” provision], was intended to compensate [the taxpayer] for the remainder of the judgment – consisting only of punitive damages and interest.”

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