IRS rules accident-lawsuit damages, including loss of consortium, are tax-free

Plain-English summary

A man riding his bike home from work was struck by a car and suffered
severe, permanent injuries, including traumatic brain injury. He and his
spouse sued the driver's employer, and a jury awarded him economic
damages (medical bills) and noneconomic damages (pain and suffering), and
awarded his spouse damages for loss of consortium; the awards were upheld
on appeal. They asked the IRS whether these damages are tax-free. Under
Code § 104(a)(2), damages received (by suit or settlement) on account of
personal physical injuries or physical sickness are excluded from gross
income, and under the 1996 amendment and its legislative history, if a
claim originates in a physical injury, all damages flowing from it (other
than punitive damages) are excludable, even damages received by someone
other than the injured person, such as a spouse's loss-of-consortium
award. The IRS held that all three categories, the husband's economic and
pain-and-suffering damages and the spouse's loss-of-consortium damages,
are compensation for his physical injuries and therefore excludable from
both spouses' gross income. This matters to accident victims and their
families deciding how to report a personal-injury recovery.

Ruling snapshot

• Question: Are the economic, pain-and-suffering, and loss-of-
  consortium damages from the personal-injury suit excludable from income
  under § 104(a)(2)?
• Outcome: Approved (all three categories excludable)
• Key authorities: IRC § 104(a)(2); Treas. Reg. § 1.104-1(c)(1);
  § 1605 of the Small Business Job Protection Act of 1996 (legislative
  history)

Full text (IRS public release)

Internal Revenue Service                     Department of the Treasury
                                             Washington, DC 20224

Number: 202050009                            Third Party Communication: None
Release Date: 12/11/2020                     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-108058-20
Date:
September 10, 2020

Legend

Taxable Year                       =      -------
Taxpayer Husband                   =      -----------------
Taxpayer Spouse                    =      ---------------
State                              =      ----------------
$x                                 =      ----------------
$y                                 =      ------------------
$z                                 =      ------------------

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

This responds to a letter dated March 6, 2020, from your representative requesting a
private letter ruling regarding the proper treatment of damages you received in the
Taxable Year. The specific issue requested in the private letter ruling is whether the
damages received in the Taxable Year are excludable from income under Section 104
of the Internal Revenue Code as being received on account of personal physical injuries
and physical sickness.

FACTS

Years before the Taxable Year, Taxpayer Husband was struck by an automobile while
riding his bike home from work ("the collision"). Taxpayer Husband suffered severe and
permanent injuries to his body, including traumatic brain injury, as a result of the
collision. Even with months of rehabilitation, Taxpayer Husband can walk only with
assistance and for short periods of time. He is in constant pain and suffers from
cognitive impairment. As a result of these injuries, Taxpayer Spouse suffered a
significant loss of consortium.

Taxpayer Husband and Taxpayer Spouse sued the company which employed the driver
who struck Taxpayer Husband, causing the collision. The lawsuit was filed in State,
where the collision occurred, and alleged that the injuries and damages suffered were
the result of acts of negligence, reckless, willful and/or wonton acts of the driver and the
company for whom the driver was employed. The lawsuit requested damages for
economic injuries (medical bills), for noneconomic injuries of mental anguish, loss of
enjoyment of life, disability, pain, suffering, and other injuries and damages (collectively,
"pain and suffering"), as well as damages for loss of consortium.

A trial court in State found the company liable, and a jury awarded Taxpayer Husband
$x amount of damages, for past and future economic damages, and $y amount of
damages for past and future noneconomic damages (pain and suffering). The jury also
awarded Taxpayer Spouse $z amount of damages for past and future loss of
consortium. The rulings and amounts of damages were upheld on appeal. The
Taxpayers received the damages in Taxable Year.

LAW AND ANALYSIS

Section 104(a)(2) provides, in general, 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.

Section 1.104-1(c)(1) of the Income Tax Regulations provides that the term "damages
received (whether by suit or agreement)" means an amount received through
prosecution of a legal suit or action based upon tort or tort type rights or through a
settlement agreement entered into in lieu of such prosecution.

Section 1.104-1(c)(1) further provides "damages for emotional distress attributable to a
physical injury or physical sickness are excluded from income under section 104(a)(2)."
See also Section 1605 of the Small Business Protection Act of 1996, H.R. Conf. Rep.
No. 104-737, at 301 (1996), reprinted in 1996 U.S.C.C.A.N. 1474, 1793 (legislative
history notes that "… the exclusion from gross income applies to any damages received
based on a claim of emotional distress that is attributable to the physical injury or
physical sickness.").

Section 1605 of the Small Business Protection Act of 1996 limits the exclusion from
gross income provided by section 104(a)(2) to amounts received on account of personal
physical injuries or physical sickness. The legislative history to the 1996 amendment
provides:

       … If an action has its origin in a physical injury or physical sickness, then
       all damages (other than punitive damages) that flow therefrom are treated
       as damages received on account of personal physical injuries or physical
       sickness whether or not the recipient of the damages is the injured party.
       For example, damages (other than punitive damages) received by an
       individual on account of a claim of loss of consortium due to the physical
       injury or physical sickness of such individual's spouse are excludable from
       gross income.

In this case, Taxpayer Husband and Taxpayer Spouse recovered damages under the
laws of State permitting recovery of a broad range of damages, including damages for
pain and suffering, and damages for loss of consortium. Thus, Taxpayer Husband and
Taxpayer Spouse received their damages in a suit or action based on tort or tort type
rights within the meaning of § 1.104-1(c). In addition, the amounts paid to Taxpayer
Husband for (1) past and future economic damages and (2) past and future
noneconomic damages (pain and suffering), and the amount paid to Taxpayer Spouse
for past and future loss of consortium were directly attributable and linked to the
physical injuries Taxpayer Husband received when the collision occurred.

HOLDING

Based strictly on the information submitted and representations made, we conclude that
(1) the amount in damages received by Taxpayer Husband for past and future
economic damages (medical bills); (2) the amount in damages received by Taxpayer
Husband for past and future noneconomic damages (pain and suffering); and (3) the
amount in damages received by Taxpayer Spouse for past and future loss of
consortium are compensation for the personal injuries Taxpayer Husband sustained in
the collision. Therefore, such amounts are excludable from Taxpayer Husband's and
Taxpayer Spouse's gross income under § 104(a)(2).

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.

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.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

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

                                       Sincerely,



                                       Christina M. Glendening
                                       Senior Counsel, Branch 5
                                       Office of Associate Chief Counsel
                                       (Income Tax & Accounting)



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