John Bullis: No physical injury lawsuit proceeds are taxable

Denise C. McMillan represented herself in Tax Court. She sued her Home Owners Association (HOA) for “alleged nuisances, claims of emotional distress, libel, slander, invasion of privacy and construction defect.”

At the trial, she claimed that either the mold or the stress had made her nauseous. She developed a rash but could not remember the name of the doctor that prescribed rash cream for her.

The HOA paid her $70,000 in settlement, but she did not report it as income in 2010, claiming it was paid for “personal injuries.”

The Tax Court pointed out that if the damages are received for personal injuries or sickness, the award for that is not taxable. However, the court also said “Emotional distress is not treated as a physical injury or physical illness, nor are physical manifestations of emotional distress, such as insomnia, headaches or stomach problems.”

The settlement documents did not say the settlement was for personal injury or sickness. So, the court decided the $70,000 was all taxable income in 2010.

It seems she was no stranger to lawsuits. In 2005 she sued the HOA for breach of covenants, breach of fiduciary duty, and nuisance. She said the HOA ignored her frequent complaints but the case information sheet she filed with the court did not show she received any payment for that complaint.

The Ventura County District Attorney’s Office prosecuted her for misdemeanor violations of California’s peeping-tom statute.

She had five previous Tax Court cases. Three cases were settled and two cases went to trial. The issue was whether her horse activity was done for profit or not – was it a trade or business? Both trials were decided against her, finding she did not show an intent to make a profit. The business expenses she claimed were disallowed. Her only horse died in 2008.

The Tax Court did not believe her testimony since she could not remember the name of the doctor she said treated her.

It all sounds like she did not do a good job of understanding the tax law or in representing herself. IRS will collect interest and penalties for several years this “drug out.”

Did you hear “However beautiful the strategy, you should occasionally look at the results.” — Winston Churchill