Suzanne Montes v. Comm., USTC, Docket No. 17332-21
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.
Firefighter’s Harassment Settlement Not Excludable Personal Injury Award (Suzanne Montes v. Comm., USTC, Docket No. 17332-21 (Jun. 29, 2023))
Suzanne Montes is a San Francisco firefighter. She was assigned to an all-male firehouse. Within days of her assignment, she was subjected to disparaging comments, sabotaged equipment, and “extremely unsanitary things (were done) to her personal property.” She complained to her chiefs of the harassment, “which only served to increase the harassment she was suffering from.” Ms. Montes filed a lawsuit and subsequently received a settlement of $382,000. Her CPA told her the settlement was not taxable and she didn’t report the payment.
Physical injury requirement not met. Settlement proceeds are excludable under §104(a)(2) only if the settlement is paid “on account of personal physical injuries or physical sickness.” The agreement between Ms. Montes and the City does not specify amounts paid for physical injury. It does talk about emotional injury and emotional distress. Ms. Montes’ complaint seeks compensation for “emotional and mental distress, damage to her reputation, and humiliation.” The Court found that since the payment was not for physical injury, it must be included in her taxable income.
Also see.
William Henry McGhee v. Comm., TCM 2023-97, where a $571,681 settlement payment for age discrimination was not excludable under §104.