This Note examines the recent amendment of I.R.C. § 104 and argues that the amendment will not clarify the tax treatment of damages but will instead lead to inequitable results and arbitrary distinctions. Part I explores the policy justifications for the exclusion of damage awards from gross income and provides a brief overview of section 104. Next, in Part II, the article reflects upon the tax treatment of damages prior to the recent amendment. In doing so, Part II focuses on the relevant case law and revenue rulings. Turning toward the tax treatment of damages under the new amendment, Part III examines Congress's intent in amending section 104. Finally, Part IV discusses the ramifications of the new amendment on damages for physical injuries and damages for emotional distress and illustrates that the new amendment is problematic. This Note concludes that the amendment to section 104 will not clarify the tax treatment of damages as intended by Congress and ends with suggestions on how section 104 could be amended so as to achieve the clarity sought by Congress.
Sharon E. Stedman, Congress's Amendment to Section 104 of the Tax Code Will not Clarify the Tax Treatment of Damages and Will Lead to Arbitrary Distinctions, 21 SEATTLE U. L. REV. 387 (1997).