If the injured petitioner is likely to invoke the Section 104 exclusion for personal physical injury, the wise practitioner needs to start with the demand letter. Remediation rarely succeeds. Judge Ronald L. (“Ingenuity”) Buch teaches the lesson in Kristen L. Quevy, T. C. Sum. Op. 2023-34, filed 12/12/23.

Kristen had physical and emotional problems, ran up big medical expenses, which she deducted prior to year at issue, was terminated by her employer, and sued.

“The first demand letter set forth Ms. Quevy’s potential claims ‘of discrimination and retaliation on the basis of her disabilities and requests for reasonable accommodation and wrongful termination.’ The second demand letter further elaborated on Ms. Quevy’s claims of discrimination and wrongful termination. The demand letters expressed her intent to sue for damages for wrongful termination on account of [employer]’s failure to accommodate her disabilities.” T. C. Sum. Op. 2023-34, at p. 3.

Of course, the employer’s counsel were careful to draw a broad release; every settling defendant wants to make sure that plaintiff will not be coming back.

“Under the terms of the settlement agreement, [employer] compensated Ms. Quevy for a broad release of claims, both known and unknown. The agreement characterizes the payment as ‘severance compensation.’ It was intended to ‘resolve all issues between them, including but not limited to Employee’s employment and the termination of that employment.’ The terms state that payment is ‘for [Ms. Quevy’s] alleged damages, which includes alleged injuries incident to her employment with Employer, including those related to both her purported personal injury and employment.’ Although the agreement mentions ‘personal injuries,’ nothing in the agreement indicates that it is for physical injuries. Ms. Quevy contends that [employer] was well aware that she suffered an assault in the workplace, and that it was ‘against that backdrop that they use the word personal injury.’ However, the record does not support Ms. Quevy’s reading of the agreement.” T. C. Sum. Op. 2023-34, at p. 6.

Whatever demands and settlement agreement say, Kristen deducted her medicals. So even if her emotional and physical injuries were treated by physicians, and reimbursement for those expenses thus eligible for Section 104 exclusion, Kristen didn’t clear the Section 111 tax benefit rule bar. She can’t exclude recompense for the medical expenses for which she’d previously gotten a tax benefit. And Kristen put in no evidence of eligible expenses for which she received no tax benefit.

The calculus for plaintiffs’ counsel is far from simple. And does the tax tail end up wagging the payout dog?