@taxquestionasker85
I'm not liking this answer. For the amount of money, you may want to get your own paid professional opinion.
Two points that I suggest considering.
1. Suppose you were renting an apartment, and your landlord caused some damages. If the landlord offered to give you free rent, plus a little extra, only the extra is taxable income. Free rent is not taxable because discounts don't create taxable income. If we assume that you are essentially renting the car, and have not acquired any basis, then I would want to think about the settlement as being "free rent" for the car plus a little extra. So the only taxable part would be the part that is more than your payments. However, the settlement could be legally separate from the lease (especially if the settlement is with a different party than the lessor) which could make the entire settlement taxable, and not a 100% discount of the lease payments.
2. The IRS generally follows "substance over form" doctrine, meaning that if a transaction looks one way on paper but is a different way in real life, the IRS will usually follow real life and not the paperwork. So I am not 100% convinced that you don't have a basis argument for making some of the settlement non-taxable.
There are enough opinions here that, based on the amount of money, it may be worth hiring your own CPA or enrolled agent to give you an opinion, who will stand behind you if you are audited.
