The Constitutionality of Taxing Compensatory Damages for Mental Distress When There Was No Accompanying Physical Injury

Abstract:     
Since 1919, statutory tax law has excluded from gross income compensatory damages received on account of a personal injury or sickness. 1 The current version of that exclusion is set forth in section 104(a)(2) of the Internal Revenue Code of 1986. The construction of that exclusion, both by the courts and by the Commissioner, underwent significant alterations over the 80-year period that the provision has existed. The statute itself was amended several times, most recently in 1996. It is the 1996 amendment that has raised a constitutional issue concerning the validity of a portion of the statute.

As a consequence of the 1996 amendment, damages received for a personal injury will not be excluded from gross income unless the victim suffered a physical injury. For this purpose, the emotional distress that a victim suffers because of a tortious act does not constitute a physical injury. Consequently, damages received for the emotional and mental distress suffered because of defamatory statements or because of discriminatory acts are excludible only to the extent that the victim incurred medical expenses thereby.

However, if a victim who suffers a physical injury from a tortious act, also suffers emotional distress, the House Report to the 1996 amendment states that damages received for the emotional distress will be excluded from gross income by section 104(a)(2). The statutory distinction made between damages received for emotional distress that accompanies a physical injury and those that do not has raised a constitutional issue in the minds of some commentators. The thesis of this commentary is that, contrary to the contention of others, the different treatment that Congress ordered in section 104(a)(2), depending upon whether the tortious act caused a physical injury, is constitutional and valid.

Number of Pages in PDF File: 12

Keywords: Taxation, Injury, Damages, Physical, Emotional Distress

JEL Classification: H20, H24

Accepted Paper Series