Donald J. Zahn


This paper will examine the history of damage award taxation beginning with the earliest income tax statute through the present law. Part II traces the 1918 and 1939 income Tax Code provisions and the court cases interpreting those provisions. Part I addresses the 1954 income Tax Code provisions and the case law which further defines tax aspects of damage awards, and Part IV outlines the 1986 tax reform legislation, the 1989 damage award changes, and recent United States Supreme Court rulings on the taxation of damage awards. Finally, Part V suggests that the courts have turned their backs on traditional reasoning behind damage award exclusion and have ignored the return of capital concept the statute was designed to protect. Moreover, Congress may have enacted tax legislation in response to court decisions, rather than basing the new legislation upon its own determinations and criteria, for later interpretation by the courts.

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