Washington Law Review


Craig Day


The Internal Revenue Service and the courts have wavered on whether punitive damages are taxable under the Internal Revenue Code. Just after the Fourth Circuit boldly declared that punitive damages are taxable, Congress amended section 104(a)(2) to tax punitive damages in cases where no physical injury is involved. Neither the courts nor the Internal Revenue Service have answered the question whether punitive damages in cases that do involve physical injury are taxable. This Comment examines the language of the amended statute and the policies leading to its enactment, and proposes that punitive damages be taxed without regard to the nature of the underlying injury.

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