Punitive Damage Award Tax Status Threatened
Washington
An overlooked provision slipped into a tax bill pending in the U.S. Senate includes a controversial section on punitive damages with implications for insurance companies as both payers and insurers of punitive damage awards.
The provision could significantly increase liability costs by abolishing the tax deduction for punitive damage payments, two attorneys contend. In addition, under the provision, if a punitive damage award is covered by insurance, the amount paid by the insurer would be included in the gross income of the policyholder.
The provision is contained in S. 1637, according to Mark A. Behrens and Kimberly D. Sandner, attorneys in the Washington office of Shook, Hardy & Bacon, in a "Legal Opinion Letter" published by the Washington Legal Foundation.
"The main point," Mr. Behrens told National Underwriter, "is that the government is looking at punitive damages as a potential revenue raiser." This, he said, has significant implications in that it could force defendants to settle lawsuits on terms that are more unfavorable than would otherwise be the case.
If a lawsuit is settled, Mr. Behrens explained, the settlement could be termed compensatory and thus would be tax deductible. However, he said, if a case goes to trial, the punitive damage portion of any verdict would not be tax deductible, which would give plaintiffs attorneys more leverage to force large settlements.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 2, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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