Until 1996, the Internal Revenue Code excluded compensatory damages–those damages included to “make whole” a plaintiff or restore a person to their pre-injury status–from the definition of “income” for tax purposes. However, ten years ago the statute was revised to exclude only compensatory damages related to physical illness or injury.
In a tort case decided today, the United States Court of Appeals for the District of Columbia held that inclusion of non-physical compensatory damages in the definition of “income” for tax purposes violates the 16th amendment.
Relying on the definition of income as a “gain”, the appellate court held that damages intended to restore a person to pre-injury status could not be considered income, even where the losses were not physical or economic.
The ruling may be appealed, but if it stands it will mean that compensatory damages in personal injury cases are no longer taxable, even if they are awarded for intangible injuries like emotional distress and loss of reputation.

The owners of the Rhode Island nightclub that burned in 2003, killing 100 people, have filed for Chapter 7 bankruptcy protection. Attorneys for victims of the nightclub fire filed no objections to the bankruptcy case, which will free the brothers of civil liability for the deaths and injuries caused by the blaze.
The ultimate outcome of those personal injury and wrongful death claims will likely not be affected, since the club owners were among several defendants, many of whom have much greater resources from which to pay personal injury claims.
The club’s $1 million general liability policy is making payment for some of the victims’ medical bills.

Remember the McDonald’s coffee case? Of course you do. It was the personal injury case in which that woman got millions of dollars, and…well, wait. Actually, the verdict was reduced to $480,000.
But still, you might say–half a million dollars for spilling hot coffee on yourself? Hasn’t that happened to all of us? Fortunately, though, most of us haven’t sustained 3rd degree burns to very personal areas as a result of those spills (probably because we don’t keep our coffee at 185 degrees!).
Nearly 15 years after the media hype about a woman who got millions of dollars for spilling coffee in her lap (who was, in fact, a woman who got $480,000 dollars after spending eight days in the hospital receiving skin grafts for third degree burns), a New York jury has returned a verdict of $300,000 in favor of a Manhattan woman after a Starbucks barista dumped a cup of hot coffee on her foot.
The court has already scheduled a hearing on the company’s argument that the award is “excessive”, and it seems likely that it will be reduced. That probably won’t make headlines. However, if the court determines that the award wasn’t excessive–that $300,000 isn’t an outrageous award to a woman who sustained permanant nerve damage in her foot, experiences constant numbness and tingling, can’t wear certain kinds of shoes and boots, and has had to give up lifelong leisure activities like ballet–then we’ll undoubtedly be hearing more about the case.

Tuesday’s ruling that Nationwide isn’t responsible for $130,000 in water damage to Julie and Paul Leonard’s Mississippi home doesn’t come as a surprise: it’s standard for homeowners insurance policies to explicitly exclude flood damage. Still, the ruling–which applies only to the Leonards’ case but will likely set precedent for the hundreds of other similar cases pending in Alabama, Louisiana and Mississippi–is a blow for already devastated hurricane victims. The Leonards will be compensated for less than $3,000 of the $130,000+ damages to their home and property stemming from the 2005 hurricanes, and similar results seem likely for scores of other hurricane victims whose homes were partially or entirely destroyed by the storms.