Appeals Court Rules Taxes On Anguish Unconstitutional

Law360, New York (August 23, 2006, 12:00 AM EDT) -- A federal appeals court ruled Tuesday that taxing compensation received for emotional distress is unconstitutional, reversing a district court’s decision and redrawing the guidelines for taxing personal injury awards.

Section 104(a)(2) of the Internal Revenue Code states that damages received for “personal physical injuries or physical sickness” aren’t subject to taxation. Since 1996, damages for nonphysical injuries—for example, mental anguish—have been specifically excluded from this exemption, and were thus taxable.

But the ruling by the U.S. Court of Appeals for the District of Columbia Circuit has...
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