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Keywords

lawsuitsettlementdamagesattorneynegligencemalpracticelegal malpracticesustained

lawsuitsettlementdamageslawyermalpractice

Related Cases

Blum v. Commissioner of Internal Revenue, T.C. Memo. 2021-18, 2021 WL 632330, 121 T.C.M. (CCH) 1147, T.C.M. (RIA) 2021-018, 2021 RIA TC Memo 2021-018

Facts

Debra Jean Blum received a $125,000 payment in 2015 as a settlement for a malpractice lawsuit against her former attorneys, who she claimed failed to properly prosecute her personal injury case against a hospital. Blum had previously suffered injuries from a fall while at the hospital and alleged that her attorneys' negligence led to her inability to recover damages from the hospital. The settlement agreement explicitly stated that it was for legal malpractice and did not compensate for any physical injuries, which Blum did not claim in her complaint against the attorneys.

Ms. Blum received a payment of $125,000 in 2015 in settlement of a lawsuit she had filed against lawyers who had previously represented her in an unsuccessful personal injury lawsuit.

Issue

Whether the $125,000 settlement payment received by Debra Jean Blum was excludable from gross income under section 104(a)(2) of the Internal Revenue Code as damages received on account of personal physical injuries or physical sickness.

whether Ms. Blum was entitled to exclude from her gross income the $125,000 settlement payment as damages received 'on account of personal physical injuries or physical sickness' under section 104(a)(2).

Rule

Under section 104(a)(2) of the Internal Revenue Code, damages received on account of personal physical injuries or physical sickness are excluded from gross income. However, the taxpayer must demonstrate a direct causal link between the damages and the personal injuries sustained.

Exclusions from gross income 'must be narrowly construed'.

Analysis

The court analyzed the settlement agreement and determined that the payment was explicitly for legal malpractice, not for personal injuries. The agreement stated that Blum did not sustain any physical injuries due to her former attorneys' negligence, and thus, the payment could not be linked to any personal injuries. The court emphasized that the nature of the claim that was the basis for the settlement controls whether the damages are excludable under section 104(a)(2).

The parties expressly identified the suit as a 'malpractice claim' and specified that they entered into the agreement 'for the purpose of compromising and settling the disputes'. The agreement further emphasized that the settlement did not compensate for any personal injuries.

Conclusion

The Tax Court concluded that the $125,000 settlement payment was not excludable from Blum's gross income under section 104(a)(2) and upheld the IRS's deficiency determination.

In sum we hold that the settlement payment is not excludable from Ms. Blum's gross income under section 104(a)(2) for tax year 2015.

Who won?

The IRS prevailed in the case because the court found that the settlement payment did not qualify for exclusion from gross income under the relevant tax code provisions.

Decision for IRS.

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