ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Wednesday, December 11, 1996 TAG: 9612110046
SECTION: NATIONAL/INTERNATIONAL PAGE: A-3 EDITION: METRO
DATELINE: WASHINGTON
SOURCE: Chicago Tribune
People who sue for personal injuries and win punitive damage awards - those often-large sums that juries hand down to punish companies - must pay taxes on the awards, the Supreme Court ruled Tuesday.
In a 6-3 decision, the court ruled that successful plaintiffs in personal injury lawsuits must pay taxes on punitive damages because the awards ``do not compensate for any kind of loss.''
Punitive damages are designed to punish wrongdoers, not to compensate victims for their injuries. ``Those damages are not a substitute for any normally untaxed personal (or financial) quality, good, or `asset,''' Justice Stephen Breyer wrote for the court.
In personal injury cases, compensatory damages - which are designed to restore a plaintiff to his position before the injury occurred - aren't taxed. Those include damages for a victims' pain and suffering and medical expenses, as well as those for lost wages in an ordinary tort case.
But lower courts had been split on how to handle punitive damages in such cases. In the case decided Tuesday, the court affirmed a decision by the U.S. Court of Appeals for the 10th Circuit, which had sided with the Internal Revenue Service.
The case arose after the family of Betty O'Gilvie, who died of toxic shock syndrome in 1983, sued tampon manufacturer Playtex International Inc. A jury awarded the family $1.5 million in compensatory damages and $10 million in punitive damages.
The family ultimately got $4.9 million in punitive damages after attorneys deducted their fees and expenses.
The IRS maintained that the O'Gilvies were required to pay taxes on the $4.9 million because the federal tax code does not exclude the award from taxable income.
But the O'Gilvies disagreed, pointing to a section of the code that excludes from income ``the amount of any damages received on account of personal injuries or sickness.'' They argued that if it had not been for the injury, they never would have received the money in the first place.
But in its opinion, the court sided with the government, ruling that the punitive damages were not ``received on account of'' the personal injuries, but because of Playtex's conduct and the jury's need to punish it.
In dissent, Justice Antonin Scalia argued that the court ``greatly understates the connection between an award of punitive damages and the personal injury complained of.''
He was joined by Justices Sandra Day O'Connor and Clarence Thomas.
The ruling affects taxpayers who challenged the IRS policy in court and whose cases are still being litigated. Congress last August amended the law to make clear that future punitive awards are taxable.
LENGTH: Medium: 57 linesby CNB