Are emotional distress injuries taxable? No, says the D.C. Circuit, at least for now. Murphy v. IRS, 460 F.3d 79 (D.C.Cir. 2006).
While this is clearly beyond the normal scope of this page, the question of taxation is always the last small opportnity for lawyers to quibble in settling employment cases (and perhaps even have the settlement fall apart). This adds a whole new dimension.