As has been widely reported, Facebook recently settled a class action lawsuit brought against the company for alleged violations of the Illinois Biometric Information Privacy Act (BIPA).
The alleged violations related to the use of facial recognition technology, including the tag suggestions feature for pictures uploaded to Facebook.
Under the BIPA settlement, Facebook is required to pay $650 million to eligible Illinois users. It is expected that each class member will receive from $200 to $400, although the actual amount will depend on the number of valid claims.
The deadline for submitting a claim was November 23, 2020.
Some claimants may not have considered the question of whether they will need to report the settlement amounts as income on their tax returns.
Federal Tax Treatment of Settlement Payments
At the federal level, the IRS has advised that the facts and circumstances surrounding each settlement payment must be considered to determine the purpose for which the money was received because not all amounts received from a settlement are exempt from taxes.
Generally, compensatory damages for personal physical injury or physical sickness are not taxable. In addition, compensatory damages received for emotional distress that results from a physical injury or sickness are treated as received for the physical injury or sickness and are not taxable.
However, under IRC Sec. 61, the general rule is that all amounts from any source are included in gross income unless a specific exception exists.
For example, in a 2003 case (T.C. Memo. 2003-168), the U.S. Tax Court found that an individual was required to include a settlement payment from a credit card company in his gross income because he did not establish that the payment was excludable as compensation for physical injury or sickness.
Similarly, in a 2013 case (TC Memo. 2013-81), proceeds received by an individual from the settlement of a lawsuit against a car dealer were gross income. The taxpayer did not indicate any law that would exclude the proceeds from income.
The IRS has also issued Publication 4345 to provide information to taxpayers about whether they must include the proceeds of certain kinds of settlements in income.
Illinois Tax Treatment of Settlement Payments
The Illinois Department of Revenue has advised taxpayers that the state’s treatment of settlements will follow the federal treatment. Accordingly, if a settlement amount is subject to federal income tax, then it will also be taxed by Illinois.
This is because Illinois begins the computation of its personal income tax with federal adjusted gross income, and there is no state adjustment that would provide an exclusion.
Therefore, it appears that those receiving money under the Facebook BIPA settlement will have to include it as taxable income on both their federal and Illinois state tax returns.
By Brian Plunkett, J.D.
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