Physical-injury damages are excluded from income

Plain-English summary

An individual received damages to compensate for actual harm caused by a criminal-law violation that resulted in personal physical injuries. The IRS concluded that the payment was received on account of those injuries and was excluded from gross income under section 104(a)(2). The exclusion does not cover any portion that reimbursed medical expenses the individual had deducted in an earlier year.

Ruling snapshot

• Question: Is a payment compensating an individual for actual damages from personal physical injuries excluded from gross income?
• Outcome: approved; the payment is excluded except to the extent it reimburses previously deducted medical expenses
• Key authorities: IRC §§ 61, 104(a)(2), 213; Treas. Reg. § 1.104-1(c)(1)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201702008 Third Party Communication: None
Release Date: 1/13/2017 Date of Communication: Not Applicable
Index Number: 104.00-00, 104.03-00
Person To Contact:
------------------------------- ----------------------, ID No. ----------------
----------------------- Telephone Number:
------------------------------ --------------------
Refer Reply To:
CC:ITA:B05
PLR-111483-16
Date:
October 07, 2016

Legend

Year 1 = ------
$x = -------------------------------------------------------
Z =---------------------

Dear --------------:

This replies to your request for a ruling that the $x you received pursuant to Z in Year 1
is excluded from your gross income under § 104(a)(2) of the Internal Revenue Code.

FACTS

Before Year 1, you suffered personal physical injuries within the meaning of § 104(a)(2).
In Year 1, you received the $x pursuant to Z to compensate you for actual damages
sustained as a consequence of the violation of criminal law that resulted in personal
physical injuries.

LAW AND ANALYSIS

Section 61 provides that gross income includes all income from whatever source
derived, except as otherwise excluded in subtitle A.

Section 104(a)(2) provides that gross income does not include the amount of any
damages received (whether by suit or agreement) on account of personal physical
injuries or physical sickness, except for amounts attributable to (and not in excess of)
deductions allowed under § 213 (relating to medical, etc., expenses) for any prior
taxable year.
PLR-111483-16 2

Section 1.104-1(c)(1) of the Income Tax Regulations provides that damages for
emotional distress attributable to a physical injury or physical sickness are excluded
from gross income under § 104(a)(2). For purposes of § 1.104-1(c), the term damages
means an amount received (other than workers' compensation) through prosecution of
a legal suit or action, or through a settlement agreement entered into in lieu of
prosecution.

Under § 1.104-1(c)(1), the $x that you received pursuant to Z in Year 1 is to
compensate you for actual damages that are attributable to the personal physical
injuries you suffered before Year 1. Thus, the $x that you received in Year 1 pursuant to
Z was received on account of personal physical injuries within the meaning of §
104(a)(2).

CONCLUSION

Based strictly on the information submitted and the representations made, we conclude
that the $x you received in Year 1 pursuant to Z is excluded from your gross income
under § 104(a)(2), except for amounts that reimbursed you for medical expenses that
you incurred and deducted before Year 1.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

                                   Sincerely,



                                   Shareen S. Pflanz
                                   Senior Technician Reviewer, Branch 5
                                   Office of Associate Chief Counsel
                                   (Income Tax & Accounting)