Tax Legal Services · Primary-source case analysis

O’Gilvie: Punitive Damages Were Not Excluded as Personal-Injury Compensation

By Aneeta Mishra and Timothy Chan

Published May 1, 2026

O’Gilvie applies a causal and compensatory-function analysis to punitive damages arising from a personal-injury lawsuit.

The award included actual and punitive damages

The family received compensatory damages and a much larger punitive award in a products-liability action, paid tax on the punitive portion, and sought a refund.

The lawsuit’s origin did not control every component

The phrase on account of required more than but-for connection to a personal-injury suit. Each category of damages had to be examined by the reason it was awarded.

Punitive damages served punishment and deterrence

Because the punitive award did not compensate the victim for injury, it fell outside the exclusion and remained in gross income.

Disposition and current law

The Court upheld taxation of the punitive damages under the older statute. Congress amended section 104(a)(2) in 1996, making the current text and timing of a recovery essential to present analysis.

Key takeaways

• Allocate settlement and judgment proceeds by function.
• Distinguish compensation from punishment.
• Do not extend an exclusion based only on the claim’s origin.
• Apply the version of section 104 in force for the relevant recovery.