The taxability of recoveries of damages on account of emotional distress remains a complicated issue under the American federal income tax law. Recent developments due to a controversial decision by the D.C. Circuit Court of Appeals have further added fuel to this debate. Even if one were to argue the justifications of exempting such recoveries from income taxation, courts do not appear to be the very appropriate kind of forum. Congress can, and in fact does tax such recoveries and the constitutional basis of such power can hardly be doubted. As a result, appropriate changes in the statute only can bring the desirable result of exempting such recoveries from income taxation.
Mahaseth, Kaushal P., "Taxing Emotional Distress Recoveries: Does Murphy Show the Way?" (2007). LLM Theses and Essays. Paper 78.