The Deductibility of Punitive Damages
Posted: 23 Nov 2001
In 1999, and again in 2000, the Clinton administration Budget Proposal for Fiscal Years 2000 and 2001, respectively, included a legislative proposal (the Proposal) that would disallow any deduction for punitive damages paid or incurred by a taxpayer, whether on a judgment or settlement of a claim. The Proposal would have governed damages paid or incurred on or after the date of enactment. Where the liability for punitive damages is covered by insurance, the damages paid by the insurer would have been includible in the gross income of the insured person and the insurer would have been required to report those payments to the Internal Revenue Service. Although the Proposal did not see the light of day in the 106th Congress, and is not part of the current Administration's Budget Proposal for Fiscal Year 2002, this report offers comments to supplement the analysis of the Proposal offered by the Joint Committee on Taxation, and to advance the discussion of the issues when and if the Proposal surfaces again.
Part I of the report provides necessary background information regarding the deductibility of punitive damages under current law and the controversy surrounding the award of punitive damages with a focus on the underlying premises for awarding punitive damages, the constitutional guideposts applicable to the imposition of punitive damages, and the substantial criticism of the regime. Part II of the report examines the arguments in favor of and against the Proposal.
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