Most damages are not punitive.  Including these.  Especially when not awarded by a jury.  

Why do you think you have to assume she was physically injured?  You're not the jury, you're on her side.  Does she say she was physically injured?  Does the settlement agreement describe what happened?  Was there any medical treatment for injuries?  Your job is not to prosecute, but to educate.  Explain to her, "If you can't make the case to IRS that physical injuries were involved, then you will have to pay tax on it.  You can either give up now, or you can wait and see what happens after the return is filed."