Summary of Facts Suzzanne Gross was former Chief Operations Officer of a mid-sized engineering firm called Anebako. She was also an investor in several projects that the firm undertook. Suzzanne supervised up to twelve engineers at the firm. A co-worker accused Suzzanne of sexual harassment. The company interviewed the initial accuser and decided to investigate the matter further. All of Suzzanne’s reporting engineers were then interviewed. Suzzanne eventually resigned, hired an attorney, and accused the company of age discrimination and defamation. In the State of Minnesota both suits are considered State civil claims. No court case was filed after a settlement was reached. Issues How will each type of payment Suzzane receives be treated for federal income tax purposes? Points of Interest The payments made to Gross from the settlement of the suit are intended solely as compensation for claimed damages on account of alleged personal injuries arising from an occurrence specified in Section 104(a)(2) of the Internal Revenue Code. The agreement states that the lump sum payments Gross received are included, and not excluded under subsection (a)(2) of Section 104 in the Code. Section 104(a)(2) of the Internal Revenue Code states “gross income does not include: 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. The total gross amount of the first two lump sum payments Gross will receive will be $320,000. Of the three different payments Gross received for the claim, the last payment was for the liquidation of her business interests in Anebako, valued at $500,000. Analysis General rule relative to taxability of amounts received from lawsuit settlements is IRC §61,
