Congratulations -- Now, Pay Up

WASHINGTON, D.C.: In a decision that could net the federal government tens of millions of dollars at the expense of victimized consumers, the Supreme Court ruled 6-3 Tuesday that federal taxes must be paid on punitive damage awards won in personal-injury lawsuits. The ruling affects consumers nationwide whose battles with the Internal Revenue Service over punitive-damage awards are still pending in lower courts. The decision serves as confirmation of legislation passed last August when Congress amended tax law to say that such awards are taxable beginning in tax year 1997. By contrast, compensatory-damage awards remain non-taxable. Writing for the court, Justice Stephen Breyer noted that federal tax law excludes from gross income those monetary awards received "on account of personal injuries." Punitive-damages awards are "not received on account of personal injuries; hence the provision does not apply and the damages are taxable," Breyer said. Justice Antonin Scalia dissented, saying "both types of damages are 'received on account of the personal injury.'" The decision came in the case of O'Gilvie vs. U.S., where the family of Betty O'Gilvie, who died of toxic shock syndrome, won $10 million in punitive damages from International Playtex, the maker of the tampons used by Mrs. O'Gilvie. Tuesday's decisions upheld rulings that forced the family to pay about $1.3 million in federal taxes on that amount.