The Constitutionality of Taxing Compensatory Damages for Mental Distress When There Was No Accompanying Physical Injury

Abstract

Since 1919, statutory tax law has excluded from gross income compensatory damages received on account of a personal injury or sickness. The current version of that exclusion is set forth in section 104(a)(2) of the Internal Revenue Code of 1986. The construction of that exclusion, both by the courts and by the Commissioner, underwent significant alterations over the 80-year period that the provision has existed. The statute itself was amended several times, most recently in 1996. It is the 1996 amendment that has raised a constitutional issue concerning the validity of a portion of the statute.As a consequence of the 1996 amendment, damages received for a personal injury will not be excluded from gross income unless the victim suffered a physical injury. For this purpose, the emotional distress that a victim suffers because of a tortious act does not constitute a physical injury. The House Report to the 1996 amendment states that "emotional distress includes physical symptoms (e.g., insomnia, headaches, stomach disorders) which may result from such emotional distress." Consequently, damages received for the emotional and mental distress suffered because of defamatory statements or because of discriminatory acts are excludible only to the extent that the victim incurred medical expenses thereby. Defamation and discriminatory acts do not cause physical injuries.