originally posted on April 29th by Forbes.com

Insurance bad faith lawsuit recoveries can be significant, dwarfing the underlying dispute. By definition, a bad faith case comes out of an underlying dispute or accident. That duality can make the tax treatment of insurance bad faith recoveries especially tricky. However, it can also invite tax planning. If the underlying incident was a physical injury accident, the compensatory damages should presumably be tax free. But in a later bad faith case, does that mean that the bad faith recovery should also get the same physical injury character?

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