## Facts

- Brenda Stadnyk bought a used car and later stopped payment on a check after the car quickly failed.
- The bank returned the check marked “NSF” despite the stop-payment order, leading the dealer to report Brenda for passing a worthless check.
- Brenda was arrested at home, jailed, booked, and detained about eight hours; she was required to undress during booking.
- Brenda testified she suffered no physical injury or abuse and incurred no medical expenses; she experienced emotional distress and saw a psychologist.
- Criminal charges were dropped.
- Brenda sued the dealer and the bank for tort-type claims (including false imprisonment, malicious prosecution, and related claims).
- The bank settled for $49,000 under an agreement that did not allocate the payment among claims or state any portion was for physical injury or sickness.
- The Stadnyks excluded the $49,000 from gross income on their joint return, believing it was excludable as personal-injury damages.

## Issues

1. Whether the $49,000 settlement was includable in gross income under I.R.C. § 61.
2. Whether the settlement was excludable under I.R.C. § 104(a)(2) as damages received “on account of personal physical injuries or physical sickness.”
3. Whether limiting § 104(a)(2) to physical injuries and treating emotional distress as nonphysical is constitutional.

## Decision

- The Sixth Circuit affirmed the Tax Court’s deficiency determination.
- The settlement was gross income under § 61 and constituted a realized accession to wealth.
- The settlement was not excludable under § 104(a)(2) because it was paid for nonphysical injuries (emotional distress from false imprisonment), not for physical injury or sickness.
- The court rejected the constitutional challenge to the amended § 104(a)(2).

## Legal Principles

- Settlement proceeds are included in gross income under I.R.C. § 61 unless a specific statutory exclusion applies; “compensatory” character alone does not remove a payment from income.
- Under the post-1996 version of I.R.C. § 104(a)(2), damages are excludable only if (1) they arise from tort or tort-type rights and (2) they are received on account of personal physical injuries or physical sickness.
- Emotional distress is not treated as a physical injury or physical sickness for § 104(a)(2) purposes; damages for emotional distress are generally taxable (apart from qualifying medical-care amounts attributable to such distress).
- Congress may define and narrow statutory exclusions from income consistent with the Sixteenth Amendment; there is no constitutional entitlement to exclude compensatory damages for nonphysical personal injuries.

## Conclusion

The court held that a $49,000 settlement arising from an arrest and short detention was taxable because the recovery was for nonphysical harms, and § 104(a)(2) excludes only damages tied to physical injury or physical sickness; Congress’s limitation of the exclusion was upheld as constitutional.


Stadnyk v. Comm’r, 367 F. App’x 586 (6th Cir. 2010)