see this web page. the Case Perez vs. Commissioner is different than your situation but here is a key part
https://www.forbes.com/sites/anthonynitti/2015/01/22/tax-court-amounts-received-by-egg-donor-are-tax...
To determine if the payments were a tax-free recovery of physical damages, the court looked next to the language of the Section 104 regulations; specifically, were the amounts received by Perez "damages" under the meaning of the regulations?
Reg. Section 1.104-1(c)(1) defines the term "damages" as "an amount received (other than workers' compensation" through prosecution of a legal suit or action, or through a settlement agreement entered into in lieu of prosecution."
Because Perez conceded she had neither sued nor settled with Donor Source, she attacked the very validity of the regulations, arguing that the IRS did not have the power to limit "damages" to amounts received in a lawsuit or due to the threat of one. Instead, "damages" should extend to situations where a taxpayer received compensation in money for a loss regardless of legal suit or action.
The court rejected her argument, so she lost the case.
you signed a contract using the terms "pain and suffering" and so should inquire as to those involved as to why they don't believe Perez applies
