Do the corporate  retailers who letter demand civil recovery (punitive
damages) from persons arrested and ticketed for "stealing", i.e.
"shoplifting" by the cities pay city, state, and federal taxes on the
profits they realize from the civil demand to the  individual
defendant who has been ticketed for the crime of stealing by the
cities  or do the corporate retailers  write these damages and these
profits off as "restitution"?
Example:  If a $5.00 item is "recovered" by secret retail security
police  in the state of Florida or Washington  minimum damages are
$200 ---- and perhaps also the retail price of the item even if the
item is immediately recovered in the Security
Offices of the private retail store in merchantable condition  because
the suspect is not allowed
to pay for the item and is charged on a city ticket with the crime of
"stealing", i.e. a completed larceny.
Is this $200 that is paid by the defendant to the corporate retailer
in response to the threat to prosecute under the civil law  fully
taxable to the retailer on his
city, state, and federal income tax returns?

Howdy cjkc-ga,

A reminder of the "Important Disclaimer: Answers and comments provided on
Google Answers are general information, and are not intended to substitute
for informed professional medical, psychiatric, psychological, tax, legal,
investment, accounting, or other professional advice."

Over the years, the subject of the taxability of punitive damages has
been controversial, but currently, the corporate retailer that collected
a civil recovery would have to pay taxes on any money collected by that
method.  Let's look at the definition of "punitive damages" first.

The American Bar Association web site provides a definition.
http://www.abanet.org/publiced/practical/books/family_legal_guide/chapter_13.pdf

"Punitive damages are money awards, which go beyond an award for other
damages."

Punitive damages don't always have to ordered by a court, but rather can
be negotiated outside of court, such as in the form of a "civil recovery"
or "demand" letter.  In your example, the punitive damages would be by
court order, but from my research it should be the same type of tax event
regardless of the method of collection.

First, would punitive damages be taxable under federal tax rules?  From
the Internal Revenue Service (IRS) web site comes the brief answer.  Even
though the folowing is from Publication 334 which is aimed at the "Small
Business," tax rules apply for all businesses.
http://www.irs.gov/publications/p334/ch05.html

"Business Income
...
Punitive damages. You must also include punitive damages in income."

This LawFinance Group article, "TAXING PUNITIVES," by Robert W. Wood gives
us a legal reference.
http://www.lawfinance.com/ARTICLES/TAXING.htm

"Uncertainty about the tax treatment of punitive damages supposedly ended
with the Small Business Job Protection Act of 1996, which specifies that
all punitive damages are taxable income to the recipient. A few months
later, the U.S. Supreme Court reached the same conclusion for punitive
damages under pre-1996 tax law. O'Gilvie v. U.S., 117 S. Ct. 452 (1996)."

Even though the following document presented on the BNA Tax Management
web site speaks to taxes on lawyer fees, it directly addresses punitive
damages.  "Taxation of Contingent Attorney Fees:  Commissioner v. Banks"
by Mona L. Hymel?
http://www.bnatax.com/tm/tmm0405_hymel.rtf

"Punitive damage awards also raise a number of interesting questions.
The statute does not mention punitive damage awards, which are taxable
in all situations."

When it comes to state tax, that would depend on the individual state,
and how the state characterizes the punitive damages.  The Civil Recovery
Services web site speaks to the "quilt work" character of state laws.
http://civilrecovery.com/page.cfm?link=articlecontent&aid=18

"Currently, state codes vary widely, and the language can be confusing.
Some refer to actual damages, some to exemplary damages, some to liquidated
damages, and some to punitive damages ..."

Perhaps a state that refers to "actual damages" might handle the taxability
issue different than one that terms it "punitive damages" but I did not find
any proof of that.

Here is how the State of Wisconsin handles it on their taxes.  From the
Wisconsin Department of Revenue web site.
http://www.dor.state.wi.us/forms/1996/96i-128.pdf

"Wisconsin - The taxable status of punitive damages is determined under the
provisions of the Internal Revenue Code as amended to December 31, 1995."

In other words, taxable.

Likewise, some cities might exempt punitive damages from local taxes, if
they have any at all, but again, I did not find any indication of this.

Obviously, any expenses incurred in the collection of the punitive damage
would be just that, an expense, and deductible.

If you need any clarification, please feel free to ask.


Search strategy:

Google search on: "punitive damages" site:.irs.gov
://www.google.com/search?hl=en&lr=&q=%22punitive+damages%22+site%3A.irs.gov

Google search on: "punitive damages" taxable OR income
://www.google.com/search?q=%22punitive+damages%22+taxable+OR+income

Looking Forward, denco-ga - Google Answers Researcher

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Request for Answer Clarification by cjkc-ga on 21 Aug 2005 20:12 PDT

Howdy denco-ga!  
Thanks for your answer.  I understand that punitive damages are
taxable income and actual damages are generally not taxable income. 
In the civil recovery statutes throughout the United States,  the
language of the "civil recovery" statutes vary.   Generally,  the
retail price of the merchandise recovered is allowed as being "actual"
damages and is not taxable
Since civil recovery demand letters are an out-of-court event and
since, in the majority of the states, the letter demand for damages
from the retailer does not have to be filed with the civil or the
criminal courts,   how do the taxing authorities verify the accuracy
of the amounts reported as punitive damages and actual damages by the
retail corporations?  That is, there is no 1099 or other official
government form that the payor of the civil damages prepares, is
there?
I am very happy with your response above and give you many stars.  
If you think you can answer my question in the paragraph above,  I
will ask it through Google and set a price.
Thanks!

---

Clarification of Answer by denco-ga on 21 Aug 2005 23:40 PDT

Howdy cjkc-ga,

"How do the taxing authorities verify the accuracy of the amounts reported
as punitive damages and actual damages by the retail corporations?"

That is a very good question.  There are many examples of tax cases where
the reporting party has mischaracterized, sometimes not thinking so, the
amount received that was actually punitive damages, and thus taxable, and
not actual damages.

These are obviously large punitive damage amounts, but the underlying tax
laws are the same with small punitive damage amounts, especially when the
small amounts are gathered to make large amounts, such as in a corporate
retail environment.

All retail operations have an opportunity to hide income from being taxed,
and indeed these kinds of payments might be easily abuse, especially if
there was some sign that lots of these payments were in cash.  There is at
least some kind of "paper trail" with payments by check or money order, in
the form of the deposits of those payments.

Yes, those payments could be mischaracterized as actual damages, and might
be by some corporate retailers.  If the Internal Revenue Service (IRS)
thought this was an area of abuse by a corporate retailer, then an audit
would be run, and charges would be made.

It could be interesting if people who paid these punitive damages also
wrote the IRS and reported those payments and characterized them as a
punitive damage payment, at least when that was the case.  If there were
enough of these letters of payment, someone at the IRS might double check
the income, or lack of income claimed, by the corporate retailers.

Looking Forward, denco-ga - Google Answers Researcher

I am grateful for the added references in your answer.  I was not
aware that some of the states are moving to treat the costs of
security differently for the retailers as regards the civil damages
under the civil recovery laws.
Since the costs of security and security equipment would be part of
"normal" overhead costs,  what are the states attempting to do?  I
will try to find out.  Thanks for this information

My pleasure cjkc-ga, and much thanks for the 5 star rating and very nice tip.

Glad I could be of assistance.

Looking Forward, denco-ga - Google Answers Researcher