[talleyman]

Income is taxable unless specifically exempt.

Among the exemptions are damages paid for personal physical injuries & sickness. The treatment of deductions depends upon the associated income - business income, business deductions, vs personal income, personal deductions.

The essence of a defamation/slander suit presumably is to replace income lost by damage to one's reputation. If the income "lost" would have been taxable, why not its replacement? On the other hand, compensation for a lost body part (don't go there) is replacing one non-taxed asset (I mean it, don't go there) with another. It's all pretty logical, actually.

[SteveH]

OK (at least, I can't come up with a ready counterargument at the moment that does not involve stuff classically regarded as "tax protestor" related), but what if the damage suffered is property loss-- for example, poor workmanship in constructing a house, or purchasing faulty equipment (machinery, software, hardware, you-name-it)? Does it make sense to tax those expenditures twice (help, lost in income tax hyperspace ;-)?? Also what about compensation for emotional damage due to loss of reputation, therapy that otherwise would not be needed and thus expenditure not made or taxable, etc.?

Don't want to drag anyone necessarily down another income tax rathole-- NST is the way to go and abolish the intrusive privacy invasion of the IRS altogether IMO.