Bombshell Tax Decision From D.C. Circuit

The D.C. Circuit ruled Tuesday that the IRS may not tax the money plaintiffs receive as compensation for emotional distress and other intangible injuries. In striking down as unconstitutional Section 104(a)(2) of the Internal Revenue Code — which says that only compensation for physical injuries is tax-exempt — the court said, “Albert Einstein may have been correct that ‘[t]he hardest thing in the world to understand is the income tax,’ but it is not hard to understand that not all receipts of money are income.”

If the Supreme Court affirms or the agency adopts the court’s finding, plaintiffs nationwide will avoid paying taxes on awards in a myriad of cases, from civil-rights to employment-discrimination.