In early March, after a two-week trial and eight hours of deliberations, a Nashville jury awarded TV sports reporter Erin Andrews $55 million in damages for her lawsuit against a Nashville hotel after she was videotaped in 2008 without her knowledge. Andrews sued for $75 million in damages for negligent infliction of emotional distress and invasion of privacy.
The main perpetrator and one defendant of the suit was an Illinois man, Michael David Barrett, who used his cellphone to videotape Andrews undressing after requesting a room next to her and then removing the peepholes from the doors. He was sentenced to 2 1/2 years jail time for his acts and found liable for $28 million of the judgment. The other “deep-pocket” defendants were the Nashville Marriott, its parent company and the ex- operator of the hotel. Andrews alleged that the hotel was negligent for giving Barrett a room next to hers without informing her, as well as not providing adequate security for guests.
Andrews’ injuries may arguably originate from a physical sickness, the mental anguish caused by the release of the videotape, however, they certainly do not arise from any personal physical injury. Thus, in the former situation, they do not constitute income; however, in the latter, they must be included as income. Yet, even in the latter case, the amount included is reduced by: (1) amounts paid for medical expenses attributable to emotional distress or mental anguish not previously deducted and (2) previously deducted medical expenses for such distress and anguish that did not provide a tax benefit.
So, unless Ms. Andrews can prove her injuries originated from an actual physical sickness, she must claim all of her damages as income less any amounts paid for mental treatment expenses. Andrews must attach to her return a statement showing the $55 million settlement amount in full less related medical costs not previously deducted and medical costs deducted for which there was no tax benefit. She must report this net taxable amount as “Other Income” on Form 1040, specifically line 21. Needless to say, an ensuing hefty bill will be forthcoming from the IRS.
Because each case is different and has its own set of facts and circumstances, it is important that upon receiving (or anticipating) any legal settlement, you should consult with an experienced and knowledgeable tax attorney to determine the taxable and non-taxable portions of your award. Your experienced tax attorneys and CPAs at Thorgood Law Firm www.thorgoodlaw.com can help answer questions about whether the proceeds of a lawsuit constitute taxable income. For a FREE consultation, call 212-490-0704.
