November 18, 2017 – Having helped countless individuals who prevailed with claims of sexual misconduct against their perpetrators deal with the financial aftermath of their civil settlements and judgments, I wish I could say I am surprised by all these recent allegations.

I am not.

I’ve met the plaintiffs who prevailed against their transgressor priests, teachers, classmates, camp counselors, coworkers, superiors and even grandparents. I’ve seen the photographs and medical records, read the deposition transcripts and listened to the voicemails. The most severe cases especially test one’s faith in humanity to know that people are actually capable of such abhorrent behavior.

The attorneys who undertake this class of cases (and I’ve had the privilege of working with some of the very best in the country) deserve tremendous, special respect because theirs is not an easy task. The litigation process can take such a heavy toll on their personal and professional lives that more than a few have left the practice of law once the matter ended.

Civil Remedies

Statutes likely have already run in many of the cases coming to light over the course of the past few weeks rendering civil justice through the courts problematic. But where lawsuits will proceed, there are some hurdles to consider.

Because the fact pattern laid out in the complaint of any civil lawsuits alleging sexual abuse and/or harassment will determine the tax treatment of any damages paid on the settlement, practitioners need to understand the distinction in the law as it pertains to this type of litigation.

In order for any settlement funds to be considered income tax-free, a demonstrable physical injury must have occurred. In instances of rape and sexual battery, medical records and police reports can easily support a claim of physical injuries.

On the other hand, in many hostile work environment or similar harassment cases where no physical injury (as recognized by U.S. Tax Code interpretation) occurs, these damages are almost universally considered nonphysical in nature and, thus fully taxable.

Two points worth highlighting here:

Emotional distress alone is insufficient to constitute physical injury; and,

Physical contact alone is insufficient to constitute physical injury.

There are some exceptions to these general rules but attorneys working on these types of cases are well advised to make sure all issues are properly evaluated and fully considered prior to filing complaints.

Unintended Consequences?

It’s a very good thing the public seems to finally be taking abuse charges, which for too long have been trivialized when reported, more seriously than they have in years past. We can only hope our culture will change for the better as a result of the focus now placed on sexual misconduct.

I applaud the brave individuals who have had the courage to come forward against the backdrop of a skeptical public and hope criminal and civil justice will ultimately be served for their sake.

That said, I’m mindful of how easy it may become going forward to ruin an innocent person’s life with false accusations and think perhaps another reading of Lillian Hellman’s The Children’s Hour may be in order.