With a pair of U.S. Supreme Court decisions in 2005 on handling litigation costs including contingent attorney’s fees1 and an attempt by Congress to resolve the controversy for such fees and expenses in 20042 with respect to costs associated with discrimination in employment and enforcement of civil rights,3 many thought the taxation of settlements and court judgments involving “personal physical injuries or physical sickness” was, at long last, settling down and taxpayers and tax practitioners could expect a modicum of certainty for a few years. However, the recently decided case of Murphy v. United States4 changed all of that. That decision held unconstitutional the provisions of I.R.C. § 104(a)(2) excluding from gross income – “The amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness.”
Harl, Neil E.
"Taxing Recoveries That Are Not "Personal Physical Injuries or Physical SIckness","
Agricultural Law Digest: Vol. 17
, Article 1.
Available at: http://lib.dr.iastate.edu/aglawdigest/vol17/iss18/1