T.C. Memo. 1999-124
UNITED STATES TAX COURT
NORRIS O. AND BETTY J. WHITLEY, Petitioners v. COMMISSIONER OF
INTERNAL REVENUE, Respondent
Docket No. 12947-97. Filed April 15, 1999.
P commenced a lawsuit in 1987, alleging that the
defendant was liable to him for breach of contract and
conversion. As to the conversion claim, the jury
awarded P actual and punitive damages. P received the
punitive damages in 1992. P argues primarily that sec.
104(a)(2), I.R.C., excludes the punitive damages from
his gross income because, he states, punitive damages
are awarded under applicable State (South Carolina) law
as compensation for a personal injury. P directs the
Court to numerous cases where the South Carolina
Supreme Court has stated that South Carolina law allows
an award of punitive damages to "vindicate a private
right" and that this right is compensatory in nature.
Held: The punitive damages are not excludable
from P's gross income under sec. 104(a)(2), I.R.C.,
because punitive damages are noncompensatory under
applicable law. Although the ultimate effect of a
punitive damage award made under South Carolina law is
compensatory in nature, such an award does not have a
compensatory purpose in the sense of reimbursing the
plaintiff for actual damages.
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