Dragged Flier Won't Have to Pay Taxes on Settlement With United

(Bloomberg) -- Dr. David Dao, who received an undisclosed settlement from United Airlines after being violently dragged off a flight earlier this month, won’t be roughed up by the Internal Revenue Service: He won’t owe any taxes on the payout.

The IRS allows for the tax-free treatment of personal-injury settlements if they’re awarded for personal physical injuries. Dao, who had boarded a Louisville, Kentucky-bound flight at Chicago’s O’Hare International Airport, sustained a concussion, broken nose and lost two teeth during his forcible removal by police employed by the city’s Department of Aviation on April 9, according to his lawyers. Payouts just for emotional distress aren’t tax-free under IRS rules.

Terms of Dao’s settlement with Chicago-based United are confidential, according to a press release issued Thursday by Corboy & Demetrio, the law firm which represents him. Asked Friday if his client’s award was free of income tax, Dao’s Chicago-based lawyer, Thomas Demetrio, wrote in an email, “Yes, it’s tax free.”

United didn’t immediately respond to an emailed request for comment on whether it would be able to deduct the payout from its corporate expenses. IRS rules broadly permit a company to deduct settlements reached privately, outside the court system, as a “business expense” that’s considered “ordinary and necessary.”

Business Expenses

Phyllis Epstein, a tax lawyer in Philadelphia, said United likely would have sought to structure the settlement so that it was tax deductible to the company. That would mean focusing on language about the need to avoid litigation and to settle a personal injury case, which are both business expenses, she said. If the settlement instead were written in a way that described United’s efforts to preserve its battered reputation, the payout would be a capital expense, which is not deductible, she said.

Payouts reached as a result of court-approved settlements often aren’t deductible by the payor, particularly if they result from a government-imposed fine or penalty levied as a result of criminal violation of a law.

A Vietnam-born, Louisville-area physician, Dao insisted he needed to see patients the next day and refused to vacate his seat. Various United officials intervened in a futile attempt to persuade him, then contacted airport authorities for assistance with his removal, which was captured on video and circulated online.

Asked if he could name the number of figures in the settlement, Demetrio replied with an emoji depicting a wide-eyed chimp with its hand over its mouth.

To contact the reporter on this story: Lynnley Browning in New York at lbrowning4@bloomberg.net.

To contact the editors responsible for this story: Alexis Leondis at aleondis@bloomberg.net, John Voskuhl