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Federal appeals court rules income tax on emotional damages unconstitutional in DC

[JURIST] The Internal Revenue Service (IRS) [official website] may not tax monies that Washington, DC plaintiffs receive to compensate for emotional distress injuries, according to a ruling [PDF text] released Wednesday by the US Court of Appeals for the District of Columbia Circuit [official website]. The plaintiff in the case was fired from her previous job, brought suit against her employer, and recovered $70,000 for emotional distress and injury to her reputation. The IRS taxed the award as income, and the appeals court found the taxation unconstitutional "because compensation for a non-physical personal injury is not income under the Sixteenth Amendment if, as here, it is unrelated to lost wages or earnings."

Awards for personal injuries under 26 USC 104(a)(2) [text] are generally tax exempt. The ruling currently only applies to the District of Columbia, but could have broader implications if the IRS decides to appeal the ruling to the US Supreme Court. AP has more.

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