Mr. Neri was a maintenance worker. When his company terminated his employment in 2004, he sued his employer for lost wages and related employment benefits. The arbitrator agreed with Neri and awarded him $150 thousand, plus attorney’s fees and costs. After deducting his fee and related costs, Neri’s attorney sent Neri a check for $83 thousand. Neri and his wife did not report any part of the award, fees, or costs on their 2007 federal income tax return.
Gross income is all income from whatever source derived, including (but not limited to) “compensation for services, including fees, commissions, fringe benefits, and similar items.” I.R.C. § 61(a)(1). Gross income does not include the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as a lump sum or as periodic payments) on account of personal physical injuries or physical sickness. I.R.C. Section § 104(a)(2).
Neri’s arbitration complaint did not ask for damages for personal physical injuries or sickness. However, though Neri’s past and present physical condition was considered in determining whether Neri was unlawfully fired, the arbitrator did not specify that the award was for personal physical injuries or sickness.
The Tax Court upheld the IRS ruling including the award in gross income. Salvador F. Neri et ux. T.C. Memo. 2012-71
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