PLR 1328022: IRS excludes damages attributable to physical injuries from gross income

Plain-English summary

The IRS ruled that an amount received under a settlement for psychological harms originating in personal physical injuries was excluded from gross income under IRC § 104(a)(2). The exclusion applied to the portion attributable to the physical injuries, but not to amounts reimbursing medical expenses that had been deducted in an earlier year. The ruling was based on the submitted facts and representations.

Ruling snapshot

• Question: Was the settlement amount excluded from gross income as damages received on account of personal physical injuries?
• Outcome: Approved, except for amounts reimbursing previously deducted medical expenses.
• Key authorities: IRC §§ 61, 104, 213; Treas. Reg. § 1.104-1.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201328022
Third Party Communication: None
Release Date: 7/12/2013 Date of Communication: Not Applicable
Index Number: 104.03-00
Person To Contact:
---------------------, ID No. ------------------

------------------------ Telephone Number:
--------------------------------- ----------------------

• Refer Reply To:
  - CC:ITA:4
  PLR-144684-12
  Date:
  April 11, 2013
  In re: -------------------------------

LEGEND:

Year 1 = -------
x = --------------------------
Z = -------------------------------

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

This replies to your request for a ruling that $x you received pursuant to Z in Year 1 is
excluded from your gross income under § 104(a)(2) of the Internal Revenue Code.

FACTS

Before Year 1, you suffered personal physical injuries within the meaning of § 104(a)(2).
In year 1, you received $x pursuant to Z to compensate you for lost wages, medical
expenses, and other pecuniary losses you incurred or expect to incur from
psychological harms that originated in the personal physical injuries.

LAW AND ANALYSIS

Section 61 provides that gross income includes all income from whatever source
derived, except as otherwise excluded in subtitle A.

Section 104(a)(2) provides 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, except for amounts attributable to (and not in excess of)
deductions allowed under § 213 (relating to medical, etc., expenses) for any prior
taxable year.

Section 1.104-1(c)(1) of the Income Tax Regulations provides that damages for
emotional distress attributable to a physical injury or physical sickness are excluded
PLR-144684-12 2

from gross income under § 104(a)(2). For purposes of § 1.104-1(c), the term damages
means an amount received (other than workers’ compensation) through prosecution of
a legal suit or action, or through a settlement agreement entered into in lieu of
prosecution.

Under § 1.104-1(c)(1), the $x that you received pursuant to Z in Year 1 is to
compensate you for psychological harms that are attributable to the personal physical
injuries you suffered before Year 1. Thus, the $x that you received in Year 1 pursuant
to Z was received on account of personal physical injuries within the meaning of
§ 104(a)(2).

CONCLUSION

Based strictly on the information submitted and the representations made, we conclude
that the $x you received in Year 1 pursuant to Z is excluded from your gross income
under § 104(a)(2), except for amounts that reimbursed you for medical expenses that
you incurred and deducted before Year 1.

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 a copy of this letter to any income tax return to which it is relevant. If
you file your returns electronically, you must attach a statement that provides 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
                                              Chief, Branch 4
                                              Office of Associate Chief Counsel
                                              (Income Tax & Accounting)

cc: