Niles v. United States

Kelly Niles (plaintiff) suffered a head injury when he was 11 years old. Negligent medical care left Niles with irreparable brain damage, and he became a quadriplegic unable to care for himself. After a lawsuit, Niles was awarded over $4 million as a lump-sum personal-injury award. During the case, Niles presented a detailed estimate of his substantial future medical expenses, which he believed would account for over $1.5 million of his award. After winning the case, Niles excluded the estimated future medical expenses from his gross income as instructed by federal law. Niles claimed a deduction for medical expenses the next year, and the Internal Revenue Service (IRS) (defendant) disallowed the deduction, arguing that Niles had already been compensated under § 213(a) of the Internal Revenue Code, the provision governing medical-care expenses, through his lump-sum award. The IRS claimed that Niles could not deduct any future medical expenses until he spent the $1.5 million of his lump-sum award that he initially allocated for future medical expenses. The IRS’s decision deviated from its usual treatment of lump-sum awards, as the United States government had followed a policy since 1922 of not allocating from lump-sum awards. The IRS explained its deviation by pointing to the way that Niles had accounted for his future medical expenses during his trial, arguing that this accounting made the future medical expenses less speculative than usual. Niles sued in district court, and the district court ruled in his favor, holding that the IRS could not allocate lump-sum awards. The IRS appealed.