Skip to main content

Volume 11 - Opinions of Counsel SBRPS No. 85

Opinions of Counsel

Senior citizens exemption (income requirement) (judicial settlement of discrimination claim) - Real Property Tax Law, § 467:

For proceeds of a judicial settlement to be excluded from taxable income, the applicant must demonstrate that the underlying cause of action giving rise to the recovery was based upon tort type rights and that the damages were received on account of personal injuries or sickness. Unless the taxpayer can prove that damages received in a settlement of claimed discrimination satisfy this test, they are income for purposes of the senior citizens exemption.

We have received an inquiry concerning the senior citizens exemption (Real Property Tax Law, § 467). An applicant received a substantial sum from a court settlement in a discrimination case (the assessor did not specify the type of discrimination alleged), and the question is whether those moneys are income for purposes of the exemption. Most likely, they are.

In 7 Op.Counsel SBEA No. 84, issued in 1981, we opined that proceeds received in an out of court insurance settlement were not income for purposes of section 467. While recognizing that Federal or State income tax treatment of moneys is not controlling for purposes of section 467 (Engle v. Talarico, 33 N.Y.2d 237, 306 N.E.2d 796, 351 N.Y.S.2d 677 (1973)), we also stated that income tax treatment is useful in determining whether moneys are income for purposes of section 467. We noted that section 104(a)(2) of the Internal Revenue Code excludes from income the amount of damages on account of personal injuries or sickness.

While the income tax treatment of recoveries for personal injuries remains the same, the law differs for purposes of other injuries. “Recoveries of lost wages or profits are included in [taxable] gross income” (33A Am Jur2d, Federal Taxation (2006) ¶ 13200). The income taxability of amounts received in settlement of an Age Discrimination in Employment Act claim were held to be taxable by the United States Supreme Court in Commissioner of Internal Revenue v. Schleier, 515 U.S. 323, 115 S.Ct. 2159, 132 L.Ed.2d 294 (1995), where a divided Court contrasted personal injury recoveries and held that recoveries of “liquidated damages under the ADEA, like back wages under the ADEA, are not received ‘on account of personal injury or sickness’” (515 U.S. at 332, 115 S.Ct. at 2165, 132 L.Ed.2d at 304). The majority concluded:

In sum, the plain language of § 104(a)(2), the text of the applicable regulation, and our decision in Burke [United States v. Burke, 504 U.S. 229, 112 S.Ct. 1867, 119 L.Ed.2d 34 (1992)] establish two independent requirements that a taxpayer must meet before a recovery may be excluded under § 104(a)(2). First, the taxpayer must demonstrate that the underlying cause of action giving rise to the recovery is “based upon tort or tort type rights”; and second, the taxpayer must show that the damages were received “on account of personal injuries or sickness.” For the reasons discussed above, we believe that respondent has failed to satisfy either requirement, and thus no part of his settlement is excludable under § 104(a)(2) (515 U.S. at 336-37, 115 S.Ct. at 2167, 132 L.Ed.2d at 307).

Consistent with that holding:

The exclusion [from gross income] for damages received on account of personal injury or sickness . . . means that the exclusion applies only if the injury or sickness is physical. *** The physical injury or sickness requirement . . . means that the exclusion doesn’t apply to amounts received for injury to reputation (personal or business), or in connection with employment, e.g., awards for job discrimination or wrongful termination (33A Am Jur2d, Federal Taxation (2006) ¶ 13205; emphasis in original).


The mere fact that a taxpayer receives an amount on the compromise, settlement, or other recovery on a claim does not make him taxable thereon. The tax treatment of the amount so realized is determined by the nature of the underlying claim, and not by the manner of collection.

Thus the amount received is taxable as ordinary income, if the underlying claim is of that character. It is settled that a recovery of punitive damages is taxable as ordinary income (47 CJS Internal Revenue § 69 (2006)). {1}

(Accord: IRS Pub. 17, Your Federal Income Tax (for 2005 returns), p.86.)

It appears, therefore, that, unless a taxpayer can supply the proof referred to in Schleier, damages recovered in a discrimination lawsuit are taxable income for purposes of the Internal Revenue Code, and, in our opinion, they are income for purposes of sections 467 of the RPTL as well.

April 6, 2006

{1}  “[P]rior to September 13, 1995, a recovery of punitive damages in a personal injury action was not taxable as ordinary income. Under current law, punitive damages not arising out of wrongful death actions are generally taxable” (47 CJS Internal Revenue § 69 (2006)).