The Supreme Court’s lack of action means you’ll need to do a little more work on certain employee reimbursements.

If a worker (or former worker) sues your company and gets an award of a settlement, the rule’s been pretty clear: Payments for physical injuries aren’t taxed; those for mental or nonphysical injuries are.

But when the other party had mental and physical complaints, it wasn’t always clear how you should treat the payment.

But a precedent-setting case has been wending its way through the courts. And now it’s at the last stop – the U.S. Supreme Court has refused to hear it, so the the final verdict is in — literally.

In the case (Murphy v. IRS, U.S. Supreme Crt., No. 067-802) , a woman sued her former employer for mental pain and anguish and damage to her reputation after she was wrongly fired.

She was awarded a settlement, but because it was expressly for nonphysical injuries, it was taxable.

She took IRS to court, arguing that part of the award was for physical problems. To make her case, she pointed out court-documented ailments she suffered, such as anxiety attacks, teeth grinding and shortness of breath.

But the courts ruled her physical problems were evidence of her mental distress after the firing, not the other way around. Therefore, the award was clearly taxable.

Hopefully, you won’t have to make many payments of this nature, but if you do, you’ll need to get certain key pieces of information, especially the specific reason behind the award or settlement.

Otherwise, if you accidentally tax a payment that should be exempt (or that the other party thinks should be exempt) you run the risk of complicating a situation that’s already full of ill-will.

Tags: Court rulings, Employee reimbursement, Legal awards, Legal settlements