CHAPTER 11 PUNITIVE DAMAGES AND INCOME TAX

• Jurisdiction: United States
• Publication year: 2018

In Greenberg v. Commissioner of Internal Revenue, 2011 TC Memo. 18, No. 25420-07. (U.S.T.C. Jan. 24, 2011), the United States Tax Court dealt with a recipient of insurance bad faith punitive damages who tried to avoid tax on the award. The result was a major tax consequence and not the windfall the plaintiffs thought they received. Because the Greenbergs could not convince the Tax Court of their position, the court not only slapped the Greenbergs down in affirming a tax deficiency of over $1 million, but further sanctioned them with an accuracy-related penalty, because the taxpayers had neither substantial authority, nor reasonable cause underlying their posture on the damage award.

The Tax Court noted:

[T]he definition of gross income broadly encompasses any accession to a taxpayer's wealth. Therefore, absent an exception by another statutory provision, damage awards from a lawsuit must be included in gross income.

In general, exclusions from income are narrowly construed [by the Tax Court]. [The Greenbergs] argued that the punitive damages they received in their insurance bad faith case may be excluded from income under section 104(a)(3)

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