In a formal submission to the U.S. Department of the Treasury and Internal Revenue Service on May 29, 2025, the National Structured Settlements Trade Association (NSSTA) requested that the IRS include guidance on the tax treatment of damages for post-traumatic stress disorder (PTSD) in its 2025–2026 Priority Guidance Plan. This request was detailed in a letter authored by counsel Matthew J. Meltzer of Flaster Greenberg PC, submitted on behalf of NSSTA.
Objective of the Guidance Request
NSSTA seeks formal IRS guidance confirming that damages received for clinically diagnosed PTSD should be treated as non-taxable under Section 104(a)(2) of the Internal Revenue Code. This provision currently excludes from gross income any damages received on account of personal physical injuries or physical sickness. The submission emphasizes that PTSD, though often misunderstood as emotional distress, has objective, physical manifestations that distinguish it from non-physical conditions and justify its treatment as a physical injury or sickness under federal tax law.
Medical and Legal Basis for NSSTA’s Position
The letter outlines scientific findings to support PTSD’s classification as a physical condition, including:
- -- Anatomical changes in the brain (notably in the limbic system, hippocampus, and amygdala).
- -- Objective neuroimaging evidence of physical disruptions.
- -- Documented biological markers, such as elevated inflammatory cytokines.
- -- Increased incidence of comorbid physical illnesses, including cardiovascular and autoimmune diseases.
NSSTA contrasts PTSD with generic emotional distress, which is associated with subjective symptoms (e.g., insomnia or stomach issues) and lacks demonstrable physical pathology.
The letter further draws on legal precedents and IRS guidance to argue that recognizing PTSD as a physical injury aligns with both statutory intent and judicial interpretation. Notably, the association distinguishes its request from cases involving transient emotional distress or insufficient evidence of physical harm.
Context: The Estate of Finnegan Case
NSSTA’s request was prompted in part by the Tax Court's 2024 decision in Estate of Finnegan v. C.I.R., in which the court declined to allocate any portion of a $25 million civil rights settlement to PTSD damages. Importantly, the court stated it did not reach the question of whether PTSD qualifies as a physical injury under Section 104(a)(2) because no such claim had been properly pled or supported in that case. NSSTA highlights this case as evidence that the legal question remains unresolved and ripe for formal IRS guidance.
Suggested Form of Guidance
NSSTA proposes that the IRS issue a revenue ruling or chief counsel advice that:
- -- Affirms damages received for diagnosed PTSD qualify as damages for personal physical injury or sickness.
- -- Clarifies the evidentiary burden (i.e., requiring clinical diagnosis and objective support).
- -- Reiterates that damages cannot be recharacterized as PTSD-based post hoc, without reference to pleadings and settlement terms.
This latest effort by NSSTA demonstrates its ongoing commitment to ensuring that structured settlement recipients are treated equitably under federal tax law, especially when suffering from medically established and physically manifested conditions like PTSD. The association emphasized its willingness to work with Treasury and IRS officials in shaping this potential guidance.
Here is the filing:
