Tax Court rules sexual harassment settlement is taxable income
Fortune-Paladino v. Commissioner, T.C. Memo. 2025-101, No. 4975-23., 2025 BL 353634, 2025 Tax CT Memo Lexis 106, Court Opinion
On October 2, 2025, the U.S. Tax Court held in Fortune-Paladino v. Commissioner that Cerissa Rene Fortune-Paladino's $135,000 settlement from her former employer was taxable income.
The court found that the payment compensated her for emotional distress and humiliation rather than physical injuries, meaning it was not excludable under Internal Revenue Code §104(a)(2).
Why It Matters
The ruling reinforces that settlements for emotional distress in employment discrimination and harassment cases are taxable unless the payment is specifically for physical injury or sickness.
Key Facts
Petitioner: Cerissa Rene Fortune-Paladino
Respondent: Commissioner of Internal Revenue
Court: U.S. Tax Court (Judge Marvel)
Employment: Drug and alcohol counselor at Davis Archway Centers for Addiction Treatment, Inc.
Events:
Alleged repeated sexual harassment by her supervisor
Terminated after returning from medical leave following car accident injuries
Filed a federal lawsuit in 2018 alleging sex discrimination and r…
