Date: Wed, 13 Jun 2007 15:40

From: Lionel Smith

Subject: Tax and damages

As a side note on punitive damages, I thought I would throw out a comment that a non-lawyer made to me about punitive damages. After I had explained more or less what they were, he immediately said, 'so do you pay income tax on those damages?'. I would guess that in most jurisdictions, the wording of the income tax statute would exclude 'damage' awards, but that was probably written with the idea of compensatory damages in mind. As a matter of tax policy, should punitives be taxable?

And what about gain-based awards? In the Kentucky Caves case, if the defendant had paid tax on cave entrance fee profits, presumably up to some limit of time he could amend his tax returns when he ended up liable to hand over a share of the profits to the plaintiff, to get the tax back. It seems to me that it is hard to see why that money should not be taxable in the hands of the plaintiff.

Lionel

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