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Settlement Proceeds Unrelated to Personal Injury or Sickness Are Subject to Taxation

Proceeds from a legal settlement unrelated to personal injury or sickness are subject to taxation, the U.S. Court of Appeals for the Sixth circuit decided February 26, 2010.

Daniel and Brenda Stadnyk received a $49,000 settlement from Bank One after the bank erroneously stamped a check as “NSF.” The check should have been stamped as a “stop payment.” The Stadnyks sought to avoid federal income tax on the $49,000 settlement arguing that it arose from allegations sounding in tort because Mrs. Stadnyk was arrested after her check was returned NSF.

The Sixth Circuit held that the settlement the Stadnyks received was the result of Bank One’s breach of contract, making the settlement proceeds subject to federal taxation.
See: Stadnyk v. Commissioner of Internal Revenue, 367 Fed. Appx. 586 (6th cir. 2010).

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Related legal case

Stadnyk v. Commissioner of Internal Revenue