When the parties settled, damages received on account of "personal" injuries were exempted from gross income. 26 U.S.C. § 104(a)(2). "Personal" injury damages had been interpreted to include damages from settlements of defamation claims. Roemer v. Comm’r, 716 F.2d 693, 700 (9th Cir.1983). Congress amended §104 in August 1996 to exempt from gross income compensatory damages received on account of "physical" injuries. This amendment overruled court decisions like Roemer.
Amended §104 included an exception for amounts received under a written binding agreement, court decree or mediation award in effect on (or issued before) September 13, 1995. 26 U.S.C. §104. The Tax Court held that post-amendment §104 applied to the three $1 million payments made to Polone after November 1996 for settlement of his defamation claim, because Polone received the payments after the amendment’s effective date. Polone appealed to the Ninth Circuit.
Polone argued the taxable gain from his entire defamation settlement should have been recognized May 3, 1996, therefore, the entire $4 million settlement would not be recognized as income. The Court observed that if it accepted Polone’s argument, then structured settlement recipients would pay taxes on their entire settlement amounts, sometimes years before receiving the funds, which is contrary to the congressional purpose of structured settlements. See Staff of Joint Comm. on Taxation, 106th Cong., Tax Treatment of Structured Settlement Arrangements (Comm. Print 1999).
Polone argued his defamation settlement payments received post amendment should not be taxed because applying amended §104 to such payments was retroactive legislation that violated his Fifth Amendment due process rights. Various tests determine whether a particular statute applies retroactively, but generally a statute operates retroactively if it attaches new legal consequences to completed, past conduct. Landgraf v. USI Film Prods., 511 U.S. 244, 270 (1994).
Section 104 applied to the payments Polone received in November 1996, May 1997 and November 1998, but did not attach new legal consequences to payments previously made. The amendment applied new tax consequences to payments made post-amendment only. Settlement payments received after the effective date of the Amendment were taxable as ordinary income.
The Tax Court decision was affirmed.
Judge(s): Sidney R. Thomas
Jurisdiction: U.S. Court of Appeals, Ninth Circuit
Related Categories: Torts
|Petitioner Lawyer(s)||Petitioner Law Firm(s)|
|Jonathan M. Brenner||Sidley Austin LLP|
|James Harris||Sidley Austin LLP|
|Respondent Lawyer(s)||Respondent Law Firm(s)|
|Donald Korb||Internal Revenue Service|
|Kenneth L. Greene||U.S. Department of Justice|
|John A. Nolet||U.S. Department of Justice|
|Bridget M. Rowan||U.S. Department of Justice|