PLR 200942015: Wrongful-death and injury-related damages receive partial exclusion

Plain-English summary

A taxpayer asked whether a payment received for assigned rights in a court damage award and a later government wrongful-death settlement would be excluded from gross income. The IRS ruled that the settlement recovery, as adjusted under the joint prosecution agreement, was excludable under section 104(a)(2), except for interest, and that the portion of the assigned payment representing damages for personal physical injury was also excludable. The IRS did not determine what portion of the assigned payment was attributable to physical injury or whether the transaction with the investor was a sale for federal tax purposes. The ruling therefore resolved the exclusion rules but left the amount and transaction characterization partly open.

Ruling snapshot

• Question: Which portions of a court-award assignment payment and wrongful-death settlement are excludable from gross income?
• Outcome: Mixed, partial exclusion
• Key authorities: IRC § 104(a)(2); Treas. Reg. § 1.104-1(c)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 200942015
Third Party Communication: None
Release Date: 10/16/2009
Date of Communication: Not Applicable
Index Number: 104.03-00
Person To Contact:
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-------------------, ID No. -----------------
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Telephone Number:
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Refer Reply To:
CC:ITA:4
PLR-103925-09
Date:
July 14, 2009

In re: ---------------------------------------------------

LEGEND:

Act = -----------------------------------------------------------------------------------------

Agency = --------------------------------------------------

Agreement = ----------------------------------------

B = --------------------------------

Court = -----------------------------------------------------------------------------

Department = ----------------------------------------------------------------------------

Entity1 = ---------------------------------------------------------

Entity2 = ---------------------------------

Entity2 Claimants = ------------------

Incident = -------------------------------------------------------------------------------------------------------
-------

T = --------------------------------------

Z = ------------------------------------------------

c = ---------
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Date 2 = -------------------

Date 3 = ----------------

Date 4 = --------------------

Date 5 = ----------------------

Year 1 = -------

Year 2 = -------

Year 3 = -------

f = -----------------------

$q = $---------------

$r = $---------------

$t = $-------------------

$v = $-------------------

w = -----

$x = $ -----------------

$y = $ -------------------

Dear -------------------

This is in reply to your request for a ruling that $x you received in Year 3, and any payment you receive from Department for the wrongful death of B, your c, are excludable from your gross income under § 104(a)(2) of the Internal Revenue Code.

FACTS

B, your c, was one of w individuals killed in Incident. In Year 1, the estates of those killed and their survivors (including you) entered into a joint prosecution agreement (JPA) to pursue claims for damages against Entity1 and its officials who were responsible for Incident. The JPA sets forth how the plaintiffs will divide any amounts they recover in litigation or settlement of their claims.
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Initial litigation The estates of those killed and their survivors initially sued Entity1 in Court in Year 1. The causes of action included claims for wrongful death and intentional infliction of emotional distress. You sought recovery for wrongful death and intentional infliction of emotional distress caused by the death of B, your c. In Year 2, Court granted summary judgment for plaintiffs on the issue of liability. In Year 3, Court awarded the plaintiffs an aggregate recovery of $v for compensatory damages, prejudgment interest, and punitive damages. You were awarded an aggregate of $y, $r against T and $q against Z.

Sale of damage award While Court award of damages was on appeal (and no later than Date 2), you sold the rights to a portion of your damage award to an investor for an immediate cash payment of $x, plus a graduated rate of return on that amount. You received the $x on or about Date 3. Several other plaintiffs also sold portions of their damage awards to the investor.

Legislative settlement Subsequently, on Date 4, Entity2 passed the Act to provide fair compensation to all Entity2 Claimants who have f claims for wrongful death and physical injury (including claims for emotional distress) against Entity1 through a comprehensive settlement of those claims. Upon Entity1’s payment to Entity2, the Act voided all prior court proceedings and judgments for f claims by Entity2 Claimants against Entity1 or its officials, and permanently precluded Entity2 Claimants from asserting f claims against Entity1 or its officials. On Date 5, Entity1 and Entity2 entered into the Agreement to resolve all f claims against Entity1. Entity1 then transferred $t to Entity2, which will be paid to claimants covered by the Agreement. Thus, pursuant to the Act, Court award of damages to the plaintiffs was voided and has been vacated.

Agency has established procedures to compensate victims pursuant to the Agreement. You must file a claim with Department to recover damages for claims of wrongful death based on the death of B, your c.

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) 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 1605 of the Small Business Job Protection Act of 1996 limits the exclusion from gross income provided by § 104(a)(2) to amounts received on account of personal physical injuries or physical sickness (subject to one exception). In H.R. Conf. Rep. No.
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104-737 at 301 (1996), Congress expressed its intent concerning the treatment of wrongful death damages and emotional distress damages attributable to a physical injury:

[D]amages (other than punitive damages) received on account of a claim of wrongful death continue to be excludable from taxable income as under present law. … Because all damages received on account of physical injury or physical sickness are excludable from gross income, the exclusion from gross income applies to any damages received based on a claim of emotional distress that is attributable to physical injury or physical sickness.

The action you brought in Court and the claim you file with Department each seek recovery of damages for wrongful death and intentional infliction of emotional distress attributable to a personal physical injury. These claims are based in tort under § 1.104- 1(c).

The Court granted summary judgment on the issue of liability on your claim of wrongful death and intentional infliction of emotional distress due to the death of B, your c, and had awarded $y for compensatory damages, interest, and punitive damages. You exchanged your right to recover a portion of the award for an immediate cash payment of $x. That $x takes the place of Court’s award. To the extent that the $x represents compensatory damages awarded for wrongful death and associated emotional distress, it is excludable from your income under § 104(a)(2).

Under the Act, any recovery of compensatory damages that Department awards you is for the wrongful death of B, your c. This wrongful death recovery (as adjusted by the JPA) is excludable from your income under § 104(a)(2).

CONCLUSIONS

Based strictly on the information submitted and the representations made, we conclude that—

1. The amount you receive from Department (as adjusted by the JPA) for the
   wrongful death of B, your c, is excludable from your gross income under §
   104(a)(2), except for any interest received.

2. The portion of the $x representing amounts received on account of a personal
   physical injury is excludable from your gross income under § 104(a)(2).

We do not express or imply an opinion on the federal tax consequences of any aspect of these transactions other than those expressed in conclusions 1 and 2, above. Specifically, we do not express an opinion about what portion, if any, of $x is properly allocable to damages received on account of a personal physical injury. See § 4.02(10)
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of Rev. Proc. 2009-3, 2009-1 I.R.B. 107, 115. In addition, we do not express any opinion whether your transaction with the investor constituted a sale for federal income tax purposes. See § 4.02(1) of Rev. Proc. 2009-3 at 115.

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

The rulings contained in this letter are based upon information and representations that you submitted under penalties of perjury. 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.

You must attach to any income tax return to which it is relevant a copy of this letter or, if you file your returns electronically, a statement providing the date and control number of this letter ruling.

In accordance with the Power of Attorney on file with this office, we are sending a copy of this letter to your authorized representative.

Sincerely,

Michael J. Montemurro
Branch Chief
Office of Associate Chief Counsel
(Income Tax & Accounting)