The “origin of the claim” doctrine requires that tax consequences be based upon the facts presented. The IRS has explained that the initial pleading is the most persuasive evidence of the tax treatment of an amount subsequently recovered by way of settlement.
Are retaliation settlements taxable?
In an employment discrimination, harassment or retaliation context, this means that a plaintiff’s recovered damages, whether through settlement or judgment, may be non-taxable if those damages resulted from physical injury or physical sickness, or if they resulted from emotional distress that was caused by or …
How does the IRS determine the deductibility of settlements?
The memorandum states that the IRS first will look to the nature of the statute pursuant to which the settlement is being paid. If the statute allows only compensatory remedies, the inquiry ends, and the settlement payment is deductible in full.
What makes a claim eligible for tax deduction?
The origin and character of the claim with respect to which an expense was incurred determines its tax treatment. Generally, if a claim arises from acts performed by a taxpayer in the ordinary course of its business operations, settlement payments and payments made pursuant to court judgments related to the claim are deductible under section 162.
How is the origin of the claim used?
The origin of the claim doc- trine controls the tax character of payments made to resolve disputes. It also has been used to help determine whether a payment made to the govern- ment is a nondeductible fine or penalty. The au- thors analyze recent authorities in this increasingly important field.
How is a settlement treated in the tax code?
Settlement refers to a mutual agreement between litigants that results from a process other than formal adjudication by a court, binding conclusion via arbitration, or other administrative hearing. For tax purposes, judgments and settlements are treated the same.
