Debra Jean Blum v. Comm., CA-9, 21-71113
This post is part of our series on recent important tax cases that may be of interest to accounting, tax, and finance professionals. For more like this, see our Federal Tax Update and California Federal Tax Update, which offer a comprehensive analysis of the year’s most pivotal tax developments.
Malpractice Settlement Regarding a Personal Injury Lawsuit was Taxable (Debra Jean Blum v. Comm., CA-9, 21-71113 (Mar. 22, 2022))
Debra Jean Blum received a payment of $125,000 in 2015 in settlement of a lawsuit she had filed against lawyers who had previously represented her in an unsuccessful personal injury lawsuit against a hospital. She did not report this amount on her 2015 federal income tax return. The only question was whether Ms. Blum was entitled to exclude from her gross income the $125,000 settlement payment as damages received “on account of personal physical injuries or physical sickness” under §104(a)(2).
Legal malpractice not on “account of physical injury.” An agreement between the parties stated that Ms. Blum’s physical injuries were alleged to have resulted from a hospital incident. She lost the resulting lawsuit. The agreement with the law firm, thus, clarified that the payment was in lieu of damages for legal malpractice, which lies outside §104(a)(2). Ms. Blum was not entitled to exclude the settlement payment from her gross income as it was not received “on account of personal injury or physical sickness,” but from a legal malpractice settlement. The Appeals Court affirmed the decision of the Tax Court.