Federal tax law defines gross income as income from all sources, unless excluded by law. Amounts received for personal injuries or personal sickness are excluded from taxation. In one case, a formerly married couple received a settlement in exchange for vacating their apartment. Neither reported the amounts on their separate tax returns. In U.S. Tax Court, they argued that a general waiver clause in the settlement made the amount nontaxable. The court noted that the clause relates to physical injuries or illness, but no claim of such a condition was presented. The court applied substantial understatement of income penalties and other penalties to both parties. (TC Memo 2023-142)
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