The facts of the Amos case are condensed as follows:

- Dennis Rodman, upon falling out of bounds during an NBA game, kicked a photographer in the groin.

- The photographer filed suit, and the dispute settled for $200,000.

- However, the settlement agreement contained a confidentiality clause.

- The photographer assumed all $200,000 was excluded from income tax as compensation for personal physical injury under IRC Sec.     104(a)(2).

- The IRS audited the photographer's tax return. They declared the $200,000 to be taxable compensation because they determined that the payment was motivated by a desire for confidentiality.

Tax Court analysis:

- The taxpayer has the burden of proving that damages are on account of personal physical injuries or sickness, under IRC Sec. 104(a)(2), citing Commissioner v Schleir, 515 U.S. 323, 328 (1995), and United States v. Burke, 504 U.S. 229, 248 (1992).

- "The nature of the claim forming the basis for the settlement controls whether such damages are excludable under IRC Sec. 104 (a)(2)." Burke, supra, 504 U.S. at 237.

- "The intent of the payor is critical" and "the character of the settlement payment hinges ultimately on the dominant reason of the payor in making the payment" Knuckles v. Commissioner, 349 F.2d 610, 613 (10th Cir. 1995).

Tax Court ruling:

- The court treated 60% of the damages as compensation for the photographer's physical injuries, and 40% as payment for confidentiality. Thus, 40% of the damages were taxable.

Impact of ruling:

- The court acknowledged that the dominant reason Mr. Rodman paid the photographer was to compensate him for his physical injuries. However, the court still held that a portion of the award represented taxable damages.

- The holding in Amos provides justification for the IRS to treat all personal injury damage awards as part taxable and part non-taxable, if the settlement agreement contains confidentiality provisions.

Plaintiffs must insist on striking confidentiality provisions from personal injury settlements that fall within IRC Sec. 104(a)(2). If the defense insists on a confidentiality provision, the plaintiff should demand the defendant and its liability carrier indemnify the plaintiff against adverse tax consequences. Or, the settlement agreement needs to be clear regarding the percentage of the total settlement that is being allocated to confidentiality, and the percentage allocated to 104(a)(2) damages. However, the best option, other than striking confidentiality provisions altogether, is to make sure express language is added to the settlement agreement stating that confidentiality is mutually beneficial to both parties and that no money is being paid for confidentiality purposes.