Federal sources confirm that the man at the center of the Dennis Hastert scandal, identified only as “Individual A”, paid no taxes on the $1.7 million he received from Hastert to guarantee his silence.
That man, a former member of Hastert’s wrestling squad in the seventies, had arranged for Hastert to pay him a total of $3.5 million. But the payments were halted when federal investigators intervened. He is currently suing Hastert to recover the remaining $1.8 million.
Contacted by NBC5 Investigates, Internal Revenue Service spokesman Jose Munoz refused to reveal the legal theories behind giving the man a pass on such a large sum. But an examination of the federal tax code describes limited scenarios where settlements are exempted from taxes.
Among those, certain types of damage payments are exempted.
The Federal Tax Code states in section 104, that “the amount of any damages received (whether by suit or agreement) on account of personal physical injuries or physical sickness,” are not taxable. Most personal injury attorneys say this has been widely interpreted to include sexual abuse, which often carries significant medical treatment.
“These settlements should be closely reviewed, and the underlying facts and circumstances should be carefully determined,” according to an explanatory guide on irs.gov . “To be excludable, an emotional distress recovery must be on account of (attributed to) personal physical injuries or sickness, unless the amount is for reimbursement of actual medical expenses related to emotional distress.”
Punitive damages, often awarded on top of compensatory awards, are not tax-free.
One source close to the investigation told NBC5 that ironically, the undercover recordings of Hastert talking to his accuser might have worked in Individual A’s favor with the IRS. Damage agreements can be difficult to prove, in the absence of a written document. None existed in this case, but agents listening in to conversations between Hastert and Individual A indicated there was ample evidence that a prior payment arrangement had been made. Those agents would have been able to thus provide evidence to any revenue agents examining his financial windfall.
Lacking official comment from the IRS, all of that is of course, open to speculation. It is likewise, not clear what the tax implications will be, if Individual A is successful in his current effort to recover the remaining $1.8 million plus interest. That case is pending in Kendall County court.