- 4 -
income tax return.
OPINION
Issue 1. Whether the Punitive Damages Are Includable in
Petitioners' Gross Income
Respondent determined that the punitive damages received by
petitioners are taxable. Petitioners contend that the punitive
damages portion of their award is excludable from gross income
pursuant to section 104(a)(2), because their lawsuit was based
upon tort or tort type rights and the jury "awarded damages it
believed would compensate their civil injuries."
Not Compensatory
Section 104(a)(2) provides that gross income does not
include "the amount of any damages received * * * on account of
personal injuries or sickness". An award of punitive damages is
not paid on account of a personal injury to the extent that the
damages are noncompensatory. See O'Gilvie v. United States, 519
U.S. 79 (1996). Whether damages are noncompensatory rests upon
applicable State law. See Bagley v. Commissioner, 105 T.C. 396,
417 (1995), affd. 121 F.3d 393 (8th Cir. 1997).
The present case involves South Dakota law. See Brandriet
v. Norwest Bank S.D., N.A., supra at 616, 618. In Hulstein v.
Meilman Food Indus., Inc., 293 N.W.2d 889, 891, 892 (S.D. 1980),
the South Dakota Supreme Court stated that, while the "sole
object of compensatory damages is to make the injured party
whole", the "purpose of awarding punitive damages is to punish
Page: Previous 1 2 3 4 5 6 7 Next
Last modified: May 25, 2011