The Internal Revenue Service (IRS) is now considering a proposed regulation that would expand the types of personal injury compensations that are exempt from income tax. The proposed rule would eliminate the requirement that compensation be paid as part of a tort remedy. However, the proposed rule would not go so far as to make clear that compensation for enduring a hostile work environment would be exempt, as noted in a comment submitted this week by Bruce Frederickson of the National Employment Lawyers Association (NELA).
Bruce Frederickson’s comment to the IRS states in part:
Non-economic damages for these types of injuries are indeed “damages for emotional distress attributable to a physical injury or physical sickness [that] are excluded from income under section 104(a)(2),” § 1.104–1(c) of the proposed rule, 74 Fed. Reg. 47153. The only difference between the physical injuries often suffered in hostile environment and employment discrimination cases (as opposed to those incurred in automobile accidents, for example) is that the physical manifestations in employment cases may not be quite so obvious to a third-party observer as are broken bones or bruises. Damages for non-tangible physical injuries are awarded to make victims whole, not to enrich them. Accordingly, such damages should be excluded from gross income and the IRS should add to the final regulation a clear statement that such damages are covered by the term “damages on account of personal physical injuries or physical sickness” in § 104(a)(2) of the Internal Revenue Code.