The woman filed an ERISA lawsuit regarding the denial of long-term disability benefits in 2005 and reached a settlement regarding her ERISA claim later that year. She did not pay taxes on the money she received because she believed that the IRS did not tax money given to a person because the loss of a bodily function or related physical disability.
However, federal Tax Court disagreed, explaining that the ERISA claim was in regards to lost employment, not disability. That is, the lump some was based on the woman’s missed workdays, not the woman’s injury or subsequent disability. Therefore, the woman needs to pay taxes on her settlement.
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