New Exclusion for Damages Received From a Wrongful Incarceration

By Cynthia E. Bolt, CPA, CGMA, associate professor, The Citadel School of Business, Charleston, S.C.

Editor: Sally P. Schreiber, J.D.

Under a new provision, damages received for wrongful incarceration are now specifically excluded from taxable income. The provision, enacted by the Protecting Americans From Tax Hikes Act (PATH), part of the Consolidated Appropriations Act, 2016, P.L. 114-113, was signed into law Dec. 18, 2015. Prior to its enactment, these awards were taxable, comparable to payments received for nonphysical injuries and punitive damages. New Sec. 139F excludes from income civil damages, restitution, and compensatory and statutory damages relating to wrongful incarceration for any criminal offense under federal or state law.

Under the new law, a wrongfully incarcerated individual is someone convicted of a covered offense who serves all or part of a sentence for the offense and (1) who is later pardoned, granted clemency, or granted amnesty for that covered offense because that individual was innocent of that covered offense, or (2) for whom the judgment of conviction for that covered offense is reversed or vacated and the indictment, information, or other accusatory instrument for that covered offense was dismissed or the individual is found not guilty at a new trial after the judgment of conviction for that covered offense was reversed or vacated.

The law contains a special provision waiving the statute of limitation to allow refund claims for periods before the date of enactment. This provision allows those who previously included wrongful conviction damages in taxable income to file an amended return, regardless of the number of years since the originally filing. However, the special waiver is available only if the taxpayer files a claim for refund or credit by Dec. 17, 2016.

Restitution payments can range from jury awards to statutory payments allowing a specific dollar amount per day or per year spent in prison. Payments often include lost wages and attorneys' fees. Some states provide free tuition at a state college or university for the victims of wrongful incarceration. Other states have no compensation laws for those exonerated, thus requiring further legal action for damages. The National Registry of Exonerations, a project of the University of Michigan Law School, has tracked exonerations since 1989. To date, there are over 1,700 cases.

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