Taxation of wrongful imprisonment cases.

Are recoveries excludable? It depends on the facts, but also on who you ask. Claims for false imprisonment or wrongful conviction can invoke the common law torts of false imprisonment, malicious prosecution, or abuse of process. Section 1983 allows suits for violation of constitutional rights,plus, twenty-two states, the District of Columbia, and the federal government now have compensation statutes for false imprisonment. Although the tax authorities are not clear about false imprisonment, being unlawfully confined behind bars seems by its very nature physical.  The issue then becomes how does the trial lawyer, settlement professional or state agency determine what information and documentation needs to be gathered to make sure their clients case qualifies as potentially tax free.

For that answer we once again turn this week to Attorney Robert Wood, the principal of Wood & Porter in San Francisco, CA and the nations premier expert in the area of taxable damage issues. Rob is also the host of the newly launched Tax Law Channel, which is sponsored by ATG Trust, and we appreciate his assistance in our month long series on taxable damage cases and how to determine if you can argue effectively for tax free treatment of the award or structured settlement.

Interestingly, payments to the following victims were all excluded from income: (1) survivors of Nazi persecution; (2) U.S. prisoners of war during World War II and the Korean War; and (3) Japanese-Americans placed in internment camps.  Unfortunately, though, the IRS has now declared that tax authority "obsolete" and has left tax experts and trial lawyers feeling in the dark as to whether all cases are taxable or not. Rob in this podcasts seems to indicate their are situations where a solid case can be made to determine a persons award does qualify as tax free under section 104, so if you are involved in these types of cases you have to be sure to listen to this podcast, visit the Tax Law Channel or read his expanded commentary in Tax Notes. 

This podcast with Scott Drake, Mark Wahlstrom, Chairman of the Legal Broadcast Network, and Rob Wood, host of the Tax Law Channel, explores what lawyers and settlement professionals can do to help in this growing field.

Listen to the entire podcast on this weeks Speaking of Settlements by clicking here.


The Article from April 2008 tax notes is available by clicking here.