Is Payment Non Taxable

[Chief]

A client's daughter dies as a result of automobile accident. The other driver fled the scene. Several weeks later her injuries caused a blood clot to form and it moves to her heart and killed her. Geico is paying client $100,000 + from her wrongful death car insurance. Is this going to be taxable? Is it like life insurance? My opinion is NO, not taxable. It is paid on her life just like regular life insurance. What do you think?

[ChEAr$]

Concur

with your assessment.

Those Tampa streets are dangerous, as my own daughter found out once, being broadsided by a downtown driver who ran the red light.
(She came out rather well though with no debilitating injuries.)

[Gene V]

Yes or NO or Some of payment

I agree, most wrongful death are nontaxable-However

This is from IRS website--seems like it depends on your state law.

Wrongful Death

Claims for wrongful death usually encompass compensatory damages for physical and mental injury, as well as punitive damages for reckless, malicious, or reprehensible conduct. As a result, both claims may generate settlement amounts. Any amounts determined to be compensatory for the personal injuries are excludable from gross income under IRC section 104(a)(2). The amounts determined to be non-compensatory, that is, punitive payments, are not excludable under IRC section 104(a)(2). This is true regardless of whether the punitive amounts are received prior or subsequent to the August 20, 1996, amendment. (See O'Gilvie, 519 U.S. 79, 117 S. Ct. 452; 96-2 U.S.T.C. 50,664; 78 AFTR 2d 7454.)

The exclusion available for personal injuries under IRC section 104(a)(2), as of August 20, 1996, reads as follows:

"* * * the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness."

As mentioned previously, caution should be used in applying this general rule that punitive damages received in wrongful death cases are taxable. The courts have generally looked to the state statute under which the wrongful death claim was litigated to determine whether there could be compensatory and/or punitive damages awarded. This search, at times, has revealed a state statute, which provides only for punitive damages in wrongful death claims. One court has ruled, that such damages received in wrongful death cases in that state are excludable from income. Burford v. United States, 642 F. Supp. 635 (N.D. Ala. 1986). The court's reasoning was that because the taxpayer is precluded from receiving any compensatory amounts, it is unfair to tax the amounts although they were classified as punitive.

Questions have arisen as to whether the 1996 amendment codified this judicial treatment of punitive damages in Burford. A new provision, IRC section 104(c), provides as follows:

(c) Application of prior law in certain cases.
The phrase "other than punitive damages" shall not apply to punitive damages awarded in a civil action -
(1) which is a wrongful death action, and
(2) with respect to which applicable State law (as in effect on September 13, 1995, and without regard to any modification after such date) provides, or has been construed to provide by a court of competent jurisdiction pursuant to a decision issued on or before September 13, 1995, that only punitive damages may be awarded in such an action.

Due to the inference raised by this language in the wrongful death claims area, it may become necessary to determine if your state is one having a statute precluding the awarding of compensatory damages in wrongful death cases. If that is the case, then contact the Office of Chief Counsel for guidance on Service position.