I am posting this decision because the Tax Court addresses one of my arguments in a prior post. Section 104(a)(2) excludes from gross income compensatory damages for physical injury or sickness. The flush language of 104(a) excludes emotional distress from the definition of physical injury or sickness.
Mr. Hennessey was an officer in the U.S. Air Force. In 1993, he was selected for involuntary separation by the U.S. Airforce's Reduction-In-Force Board. The Board was directed by the Secretary of the U.S. Air Force to consider factors such as gender and race, particularly females and minorities, in making their selections. The justification given was past "individual and societal attitudes, policies, and practices."
In 1998, Mr. Hennessey, among others, filed a class-action law suit alleging violation of their equal protection rights under the 5th amendment because the Board "improperly considered race and gender." The suit was settled and Mr. Hennessey received a $30,000 lump-sum payment.
Mr. Hennessey did not include the lump-sum payment on his 2004 tax return and of course the IRS quickly addressed Mr. Hennessey's apparant oversight. The IRS wins here because the payments were not for physical injury or physical sickness as required by section 104(a).
Among Mr. Hennessey's many arguments is the same equal protection argument I suggested in my previous post - namely, that their is no rational basis for treating physical injuries different than mental injuries. The Tax Court dismisses Mr. Hennessey's equal protection argument by citing a Sixth Circuit decision holding the statute constitutional. Young v. United States, 332 F.3d 893 (6th Cir. 2003). Mr. Hennessey, however, lives in Missouri which is in the Eight Circuit. I assume if an Eigth Circuit decision existed the Tax Court would have cited one. Maybe Mr. Hennessey will appeal this issue to the Eigth Circuit.
I will write a post soon analyzing the Young decision.
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