Payment for suicide allegedly caused by job stress is excludible.

• Author: Barton, Peter C.

The Tax Court recently allowed a payment by a company to the widow of one of its former employees who had committed suicide allegedly because of job stress to be excluded from income. In Paton, TC Memo 1992-627, the court ruled that even though the settlement documents for the payment did not mention any wrongful death or other tort-type claim, the company's intent was to settle a wrongful death claim.

Sec. 104(a)(2) excludes "the amount of any damages received ... on account of personal injury." Regs. Sec. 1.104-1(c) specifies that the injury must be based on a tort-type claim. Previous Tax Court rulings have based the exclusion on the "nature of the underlying claim rather than the validity of the claim." These rulings have determined that, when the settlement documents do not specify the reason for the payment, the nature of the underlying claim is based on the payor's intent in making the payment.

Dr. Paton, a veterinarian, had been employed as the manager of the animal health division of a drug company. When the company made budget cuts, he was forced to fire several employees, including some with whom he had worked for many years. These staff reductions in turn made it difficult for Dr. Paton's division to maintain production quality. The company blamed Dr. Paton when a defective batch of animal vaccines was distributed to the public. He committed suicide in June 1982, and the company paid his salary for the rest of the year.

His widow believed that the company was responsible for his suicide. Her attorney advised her that there might be a wrongful death claim of uncertain strength against the company. The attorney then wrote a letter to the company requesting a payment to Mrs. Paton. The letter alleged that the job pressures caused Dr. Paton's death and implicitly threatened litigation.

The president of the company, in a written reply, offered to pay $50,000 "out of concern for Mrs. Paton's well-being--and not because of any legal obligation." The president then requested that she sign a general release "to avoid any misunderstanding." The release did not specify the reason for payment. No taxes were withheld on the payment, which was reported to the IRS as nonemployee compensation on Form 1099-MISC.

Mrs. Paton first argued that the payment was a gift. The court rejected this contention; it found that the company did not make the payment out of disinterested generosity, which is required for a gift.

Alternatively, she claimed that...