IRS excluded wrongful death settlement from gross income

Plain-English summary

The IRS ruled that a payment received by an estate under a legislative settlement for the wrongful death of the decedent would be excluded from the estate's gross income under IRC § 104(a)(2). The estate's claim arose from a personal physical injury and included wrongful death and related emotional distress claims. The payment was to be made through agency procedures after a prior court judgment was voided, and the taxpayer represented that the payment would not include interest or punitive damages. The ruling treated the recovery, as adjusted under the joint prosecution agreement, as damages received on account of a personal physical injury.

Ruling snapshot

• Question: Would the estate's wrongful death recovery under the legislative settlement be excluded from gross income?
• Outcome: Approved
• Key authorities: IRC § 104(a)(2); Treas. Reg. § 1.104-1(c); Small Business Job Protection Act of 1996, § 1605

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201025027
Third Party Communication: None
Release Date: 6/25/2010 Date of Communication: Not Applicable
Index Number: 104.03-00

-------------------------------------- Person To Contact:
------------------------------------------------ -------------------, ID No. ----------------
----------------------------------- Telephone Number:
-------------- --------------------

                                                          Refer Reply To:
                                                          CC:ITA:4
                                                          PLR-140446-09
                                                          Date: February 23, 2010
                                                          February 23, 2010

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

LEGEND:

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

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

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

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

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

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

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

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

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

T = ---------------------------------------
PLR-140446-09 2

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

Date 1 = --------------------
Date 2 = ---------------------

Year 1 = ------

Year 2 = ------

Year 3 = ------

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

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

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

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

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

w = -----

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

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

This is in reply to your request for a ruling that any payment the Estate of B (Estate)
receives for the wrongful death of B, is excludable from Estate’s gross income under §
104(a)(2) of the Internal Revenue Code. You are the administrator of Estate.

FACTS

B was one of w individuals killed in Incident. In Year 1, the estates of those killed
(including Estate) and their survivors 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.

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. As the administrator of Estate, you sought recovery for
wrongful death and intentional infliction of emotional distress caused by the death of B.
In Year 2, Court granted summary judgment for plaintiffs on the issue of liability. In
PLR-140446-09 3

Year 3, Court awarded the plaintiffs an aggregate recovery of $v for compensatory
damages, prejudgment interest, and punitive damages. Estate was awarded an
aggregate of $y, $r against T and $q against Z.

Legislative settlement Subsequently, on Date 1, 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 2, 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.
As the administrator of Estate, you must file a claim pursuant to these procedures to
recover damages for claims of wrongful death based on the death of B. You represent
that any payment will not include interest or punitive damages.

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.
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.

PLR-140446-09 4

The action Estate brought in Court and the claim Estate files pursuant to Agency
procedures 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).

Under the Act, any recovery of compensatory damages that Estate receives pursuant to
Agency procedures is for the wrongful death of B. This wrongful death recovery (as
adjusted by the JPA) is received on account of a personal physical injury under §
104(a)(2).

CONCLUSION

Based strictly on the information submitted and the representations made, we conclude
that the amount Estate receives pursuant to Agency procedures (as adjusted by the
JPA) for the wrongful death of B is excludable from Estate’s 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 the conclusion above. 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
Estate 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.

Estate must attach to any income tax return to which it is relevant a copy of this letter or,
if Estate files its 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 Estate’s authorized representative.

                                              Sincerely,

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