Overview
This article is designed to outline the tax treatment of post-traumatic stress disorder (PTSD) damages for plaintiffs. PTSD has become a household illness particularly among our soldiers returning from Iraq and Afghanistan. Numerous media outlets have provided coverage regarding the high level of suicide in the war zone and high level of mental trauma among veterans. In some cases, it would seem that the entire force is fighting the war while being medicated with Prozac. Is this somehow a new disease?
It seems in past wars, an accurate diagnosis was lacking and the problem was untreated, masked by alcoholism, domestic abuse, violent crime, chronic unemployment and homelessness. PTSD is also being diagnosed in victims of child abuse and many other scenarios including workplace trauma. Attorney Rob Wood has cited the Argentinean writer Jose Narosky who observed that in war, there are no unwounded soldiers.
Throughout this tax series, I have been examining the tax treatment of various types of damages. As we have learned, it is not always clear cut. Prior to the addition IRC Sec 104(a)(2), taxpayers and their counsel tried to categorize as much of the damages as “emotional distress” so that they could receive tax-free treatment on settlements for emotional distress
Congress’ response was in the opposite direction. The IRS took the litigating posture that it wanted broken bones and bruises as proof of damages “on account of physical injury and sickness. Unfortunately, with an illness such as PTSD, the bruises and brokenness are all internal.
What is PTSD?
In 2000, the American Psychiatric Association revised the diagnostic criteria for PTSD in its diagnostic and Statistical Manual of Mental Disorders (DSM-IV-TR)(1). The diagnostic criteria includes a history of exposure to a traumatic event including two criteria and symptoms from each of three clusters- intrusive recollections, avoidant/numbing symptoms and hyper arousal symptoms.
Criterion A: Stressor
The person has been exposed to a traumatic event in which both of the following have been present”
- The person has experienced, witnessed or been confronted with an event that involved actual or threatened death or serious injury.
- The person’s response involved intense fear, helplessness or horror.
Criterion B: Intrusive Recollection
The traumatic event is persistently re-experienced in at least one of the following ways:
- Recurrent and intrusive distressing recollections of the event including images, thoughts or perceptions.
- Recurrent distressing dreams of the event.
- Acting or feeling as if the traumatic event were recurring such as hallucinations, or flashbacks.
- Intense psychological distress at exposure to internal or external cues that symbolize or resemble an aspect of the traumatic event.
- Physiologic reactivity to internal or external cues that symbolize or resemble an aspect of the traumatic event.
Criterion C: Avoidant/Numbing
Persistent avoidance of stimuli...
