Has the payment already been made and a 1099 issued?  Or are you trying to avoid tax problems with something that has not yet happened?  It's possible to have a discrimination claim that includes enough physical injury to qualify it under 104(a)(2).  For examples, see the Tax Court cases that involve employees whose MS is aggravated, or who have a heart attack.  But "emotional distress," by itself, is not a physical injury.

If a 1099 has been issued, the payor has made the determination that it is taxable.  Failing to report it on a tax return, even when disclosing the reason, will be an uphill battle.