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.
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.