Auto Dealer Discrimination Settlement Includable in Income

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By Matthew Beddingfield

Aug. 22 — A taxpayer who received a $45,000 settlement from a discrimination lawsuit against his former employer must include that amount in his 2012 income, but can take an above-the-line deduction for his legal fees ( George v. Commissioner , T.C., No. 2065-15, T.C. Memo. 2016-156, 8/22/16 ).

U.S. Tax Court Judge Albert G. Lauber ruled Aug. 22 that Abraham George, who was awarded the settlement from Dana Motors Ltd., a New York auto dealership, couldn't exclude the settlement payment under tax code Section 104(a)(2) because the payment didn't stem from a settlement over “psychological and physical harms.”

The Internal Revenue Service issued George a deficiency notice for more than $10,000 due to his failure to include the settlement amounts in his gross income for 2012.

George sued the dealership in 2011 to “remedy Dana's discrimination in employment” based on his national origin. The parties entered into a confidential settlement and general release agreement in May 2012, which resulted in Dana paying George $45,000—$15,000 of which was immediately paid to his attorney for legal fees.

In his Tax Court petition, George argued that the payment was excludable from gross income under Section 104(a)(2), which allows a taxpayer to exclude from gross income the amount of any damages received on account of personal physical injuries or physical sickness.

According to Lauber, although George's “complaint included a general allegation of ‘psychological and physical harms,' he did not allege with any specificity that he had suffered actual physical injury or physical sickness.” Lauber ruled that the amounts were includable in George's gross income, but that because he paid legal fees to secure the discrimination settlement, Section 62 entitled him to an above-the-line deduction for the legal fees paid.

Jeffrey Melcer represented George. Marissa Savit represented the commissioner.

To contact the reporter on this story: Matthew Beddingfield in Washington at mbeddingfield@bna.com

To contact the editor responsible for this story: Cheryl Saenz at csaenz@bna.com

For More Information

Text of the decision is in TaxCore.

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