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Sunday, March 02, 2003


Tonia V. Cates received a $45,000 settlement from former employer Rockford Memorial Health Services, Inc. as a result of race discrimination suit. The settlement allocated $10,000 to lost wages and $35,000 to emotional distress. The law allows settlement proceeds to be excluded if they are for tort recoveries for personal physical injuries or physical sickness. Ms. Cates said that the emotional distress caused physical sicknesses of headaches, insomnia, and stomach problems. Tax Court said that section 104(a) excludes emotional distress from the definition of a physical injury or sickness, and that the legislative history indicates that Congress intended that the exact physical symptoms of emotional distress that Ms. Cates complains of should not be considered physical injury or sickness for purposes of this exclusion from income. Ms. Cates also claimed that the $35,000 intended to compensate her for her hypertension, but Tax Court found no evidence for that in the record, and further noted that she was diagnosed with hypertension before she was hired by Rockford, making highly unlikely that they intended to compensate for that.

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