January 19, 2018

Punitive Damages

Punitive damages are meant to not only punish, but also to deter the defendant and others from committing similar acts as those that formed the basis of the lawsuit. The Internal Revenue Code, Section 104(a)(2), underlying that any damages received as a result of personal physical injury or physical sickness would be income tax exempt, specifically excludes punitive damages.

Since punitive damages are taxable, the preparation of a Structured Settlement is critical and should be conducted by professionals to avoid IRS penalties. We, at Vega Settlement Group, understand the complex tax issues involved in a legal settlement and will work to ensure that your structure is properly established and follows the proper Tax Codes that govern your settlement.

Punitive DamagesPunitive damages are awarded only if the defendant’s conduct is deemed as malicious or in reckless disregard of rights. Conduct deemed as malicious is accompanied by ill will, spite, or for the purpose of injuring another party. With that being said, punitive damages are only awarded in special cases where compensatory damages are considered to be insufficient. They are awarded by the court as a means to prevent under-compensation, as a way to compensate for undetectable wrongful acts, and/or for taking a strain away from the criminal justice system.

Because they are paid in excess of the plaintiff’s compensation, the plaintiff has the burden of proving that punitive damages should be awarded by a preponderance of the evidence. “Preponderance of the evidence” is also known as the burden of proof, in which the plaintiff must shift the accepted conclusion away from an opposing opinion to his/her own.

For the benefit and protection of the claimant, we help ensure that the settlement will distinctly allocate funds between taxable (punitive) and nontaxable (compensatory) damages.