Jackson Lewis LLP reports this Federal Case from the DC Circuit which holds that they are taxable.

"DC Circuit rules that damages for non-physical injury are subject to federal taxation
Jackson Lewis LLP

USA
July 13 2007

The U.S. Court of Appeals for the District of Columbia Circuit has resolved the constitutional question it first created concerning the taxability of damages for emotional distress or mental anguish and loss of reputation (non-physical personal injury). After reviewing the issue, the D.C. Circuit has held that such damages were taxable. Murphy v. IRS, No. 05-5139 (D.C. Cir. July 3, 2007). "