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Back pay awarded in employment discrimination dispute is taxable.

The Supreme Court Ruling in Burke Does Not Resolve the Dispute for Other Taxpayers

The Supreme Court recently held that a back pay award resulting from a Title VII claim for sex-based employment discrimination is not sheltered from taxation under the Sec. 104(a)(2) exclusion for personal injury damages. The Court's decision in Burke(1) addresses an issue that has been the source of much contention in the lower courts. The back pay issue is one that is inherent in all employment discrimination actions and the Court's opinion could result in millions of dollars in tax revenue for the GovernMent. Additionally, the Court's focus on the remedies available under Title VII in resolving Burke may represent an additional test for resolving other personal injury disputes in which damages are based (wholly or partially) on lost income (e.g., damages for professional defamation).

In order to offer sound tax planning and compliance services, practitioners must familiarize themselves with the Burke decision and its effect on the taxation of damages derived in employment discrimination disputes. This article will examine the current status of Sec. 104(a)(2) in light of the Supreme Court's decision in Burke; analyze the controversy surrounding the taxation of back pay awarded in employment discrimination actions and the Court's apparent resolution of this dispute; address the possible extension of the Court's decision to other personal injury actions in which damages are determined with reference to lost income; and discuss the planning requirements associated with ensuring the nontaxability of a personal injury award.

Sec. 104(a)(2)

Since its inception, significant uncertainty has surrounded the exclusion for personal injury damages.(2) This confusion has reigned over the years despite the apparent clarity of the statutory language. The relevant language of Sec. 104(a)(2) provides for the exclusion of "any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or sickness." (As a result of an amendment included in the Omnibus Budget Reconciliation Act of 1989, the exclusion does not extend to punitive damages derived from nonphysical injuries.) Neither the statute nor its legislative history(3) defines the term "personal injuries." Instead, regulatory and judicial authority must be examined to determine what injuries are "personal" within the scope of Sec. 104(a)(2). Regs. Sec. 1.104-1(c) is the focal point in resolving disputes in the area:

The term "damages received (whether by suit or agreement)" means an amount received (other than workmen's compensation) through prosecution of a legal suit or action based upon tort or tort type rights, or through a settlement agreement entered into in lieu of such prosecution. (Emphasis added.)

The courts have consistently stressed the need for the presence of a tort-type claim for any application of Sec. 104(a)(2). A tort is a "private or civil wrong or injury, other than breach of contract, for which the court will provide a remedy in the form of an action for damages."(4) Although most actions giving rise to excludible damages will involve a tort right under common or state law, Sec. 104(a)(2) is not limited to such actions. The exclusion also extends to "suits or actions which involve a legal right that is more analogous to a tort-type right than to any other legal category of rights."(5)

"Nature of Claim" Is Proper Inquiry

The controlling factor in determining the applicability of Sec. 104(a)(2) to damages received in a dispute is the nature of the claim asserted, not its validity.6the facts surrounding a payment determine whether the amount redresses a tort-type claim or some nontort (e.g., contractual) claim.(7) State or Federal law under which a claim is asserted determines whether the claim is of a tort-type nature.(8)

* Court-awarded damages

In the case of court-awarded damages, the basis for which the jury or judge arrived at the award will determine the applicability of Sec. 104(a)(2).(9) When it is unclear as to why damages were awarded by a court, the facts and circumstances surrounding the dispute will be examined to determine the nature of the claim. Relevant factors for this purpose include the allegations contained in the petitioner's complaints, the evidence presented and the arguments made in the state or Federal court proceeding.(10)

* Settlement damages

More frequently, damages are paid as the result of a settlement agreement. The statute specifically acknowledges the excludability of personal injury damages awarded in settlement agreements. In applying the nature of the claim test to settlement damages, the express language of the agreement will generally be determinative.(11) Damages specifically noted in an agreement as being paid to settle a personal injury claim should be excludible under Sec. 104(a)(2). Conversely, an award that is specifically noted in the settlement agreement as redressing a contractual (or other nontort) claim will be taxable.(12)

When an agreement is silent or ambiguous about the purpose of the payment, the courts look to the intent of the payor to determine the nature of the claim settled.(13) The facts surrounding the settlement will establish whether the payor intended to settle a tort-type claim.14a taxpayer may be hard pressed to assert the nontaxability of a settlement payment if the payor steadfastly refused to acknowledge any liability for a tort-type injury.(15)

Injuries Falling Within Sec. 104(a)(2)

The Sec. 104(a)(2) exclusion clearly applies to damages received on account of both physical and nonphysical personal injuries.(16) Not surprisingly, taxpayer disputes with the IRS about Sec. 104(a)(2) almost invariably pertain to damages resulting from claims for nonphysical injuries. Not long ago, damages awarded for injuries to a taxpayer's professional reputation ("professional defamation") attracted much of the IRS's attention in the area. Recently, however, the predominant share of the litigation involving Sec. 104(a)(2) has concerned damages derived in employment discrimination disputes. The legal theories expounded in professional defamation cases have served as the basis for resolving the more recent employment discrimination cases.

* Defamation of professional character

The IRS has long distinguished between damages received for injury to a taxpayer's "professional" reputation and damages received for injury to a taxpayer's "personal" reputation.(17) The IRS's position is that some or all of the damages derived from a professional defamation action represent business income lost as a result of the defamation and that such lost profits are not excludible under Sec. 104(a)(2).(18) The courts, while vacillating on the issue initially,(19) have in more recent cases uniformly rejected the IRS's personal/professional reputation dichotomy. In the landmark Roemer decision, the Ninth Circuit addressed the applicability of Sec. 104(a)(2) to damages derived in a professional defamation suit and rejected the Service's position with the following explanation:

This injury to the person should not be confused with the derivative consequences of the defamatory attack, i.e., the loss of reputation in the community and any resulting loss of income. The nonpersonal consequences of a personal injury, such as a loss of future income, are often the most persuasive means of proving the extent of the injury that was suffered. The personal nature of an injury should not be defined by its effect.(20) This analysis was adopted by the Tax Court in Threlkeld, a reviewed decision:

Section 104(a)(2) excludes from income amounts received as damages on account of personal injuries. Therefore, whether the damages received are paid on account of "personal injuries" should be the beginning and the end of the inquiry. To determine whether the injury complained of is personal, we must look to the origin and character of the claim ... , and not to the consequences that result from the injury.(21)

While strongly denouncing the "consequences of the injury" approach in examining the excludability of professional defamation damages, the Tax Court, until recently, consistently used that test in addressing damages derived as a result of employment discrimination.(22)

The professional defamation cases affect the resolution of employment discrimination cases due to the emphasis in both types of actions on remedies that are determined with reference to lost income (profits or wages). The nature of the claim test espoused in Roemer has been applied by several courts in resolving the issue of back pay and Sec. 104(a)(2).

Employment Discrimination

and Back Pay Awards

Employment discrimination cases resulting in large settlements have become increasingly common throughout the legal system. Two of the largest awards in employment discrimination disputes resolved to date, involving a phone company and an airline, illustrate the reason for the IRS's scrutiny of amounts awarded in employment discrimination cases.(23)

Various Federal and state laws protect individuals from discrimination in the workplace. The most frequently cited antidiscrimination statute is Title VII of the Civil Rights Act of 1964(24) (Title VII), which makes it unlawful for an employer "to discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual's race, color, religion, sex, or national origin,"(25) or because of "pregnancy, childbirth, or related medical conditions."(26) The Age Discrimination in Employment Act of 1967 (ADEA)(27) and the Equal Pay Act of 1963 (EPA)(28) are other examples of Federal statutes, that protect employees from discriminatory acts by employers. When an employee has suffered employment discrimination, the individual may seek remedies under the applicable antidiscrimination statute. Monetary remedies under Title VII have historically been limited to "back pay ... or any other equitable relief ... "(29) The Civil Rights Act of 1991 amended Title VII to also authorize the recovery of compensatory and punitive damages (for cases filed on or after Nov. 21, 1991).(30) Remedies under the ADEA and the EPA also provide for remedies including back pay.

Whether back pay awards are excludible as damages for personal injuries has been the source of much contention not only between taxpayers and the IRS, but also between the courts themselves. The IRS clearly acknowledges the excludability of all damages received as a result of a physical injury, even when such damages are determined with reference to lost wages.(31) However, the IRS's position is quite different toward similarly computed damages in nonphysical personal injury disputes such as professional defamation (lost profits) or employment discrimination (back pay). The IRS's basic position is that damages awarded for nonphysical injuries are taxable if such damages are determined with reference to lost income.(32) As noted earlier, the courts have uniformly rejected the IRS's position with respect to professional defamation damages, but considerable differences have arisen in the courts regarding the issue of back pay awarded in employment discrimination actions.

* Back pay is exludible

Prior to the Burke decision, a large body of case law supported the proposition that back pay damages awarded in an employment discrimination dispute were excludible under Sec. 104(a)(2). The Tax Court,(33) along with the Third,(34) Sixth(35) and Tenth(36) Circuits, had applied the nature of the claim test to back pay damages awarded for employment discrimination and found such amounts to constitute excludible personal injury damages. These various courts have viewed the IRS's focus on the remedies (i.e., back pay) in an employment discrimination action as a continuation of the consequences of the injury approach that has been rejected in favor of the nature of the claim test. Once an asserted discrimination had been established as being of a tort-type nature, the courts held that any remedies flowing from the action, including any back pay, constituted damages received for personal injuries that were excludible under Sec. 104(a)(2).

* Back pay is taxable

There also existed prior to Burke several decisions in which back pay derived in an employment discrimination dispute was held to be taxable. The Court of Claims(37) and the Fourth(38) Fifth(39) and District of Columbia(40) Circuits all decided in favor of the IRS on the issue of back pay. While the arguments for finding such back pay not to be excludible under Sec. 104(a)(2) have varied slightly, they share a common focus on the remedy (i.e., back pay) instead of the underlying action asserted. These courts generally accepted the nature of the claim test as being the proper inquiry in resolving a Sec. 104(a)(2) dispute, but resolved that test with an analysis of the remedies awarded (or available) under the controlling antidiscrimination statute. The Supreme Court affirmed this approach in Burke by embracing the nature of the claim test and looking to the remedies under Title VII to establish the nature of such actions.

The Burke Case

The Supreme Court agreed to review the Sixth Circuit's decision in Burke in order to resolve the conflict between the appellate courts regarding the proper treatment of back pay awards in Title VII actions. In reversing the Sixth Circuit's decision, the Supreme Court accepted the nature of the claim test as the proper inquiry, but concluded from its focus on Title VII remedies that claims under that statute are not of a tort-type nature for purposes of Sec. 104(a)(2).

* Facts of the case

As an employee of the Tennessee Valley Authority (TVA), Therese Burke was a plaintiff in a suit involving charges of discriminatory employment practices by the TVA. The suit alleged that the TVA had systematically discriminated in the payment of salaries on the basis of sex. The plaintiffs asserted that salaries of female-dominated pay schedules were not increased in line with salary increases applied to male-dominated pay schedules and that, in fact, some salaries of female-dominated pay schedules had been lowered. The suit requested back pay and any other equitable relief warranted for the affected employees, and injunctive relief restraining the TVA from further engaging in sex-based discrimination.

The TVA and the plaintiffs entered into a settlement that required the TVA to pay approximately $5 million to the affected employees, with each employee to receive an amount based on a formula involving length of service and rates of pay. The pretax settlement amount awarded to Burke was about $765. The settlement agreement provided that the TVA would withhold Federal income taxes from the amounts paid each affected employee. Burke filed a claim for refund for the taxes withheld (approximately $153) from her settlement payment and, on the IRS's disallowance of such claim, commenced a refund action in the U. S. District Court for the Eastern District of Tennessee.

* District court rules back pay is taxable

The district court examined Sec. 104(a)(2) and concluded that the nature of the claim test was the proper inquiry under that provision. The court acknowledged that Title VII injuries are of a tort-type nature and that a settlement of a claim for such injuries could be excludible under Sec. 104(a)(2). However, the court held that a back pay award for a Title VII action was not so excludible. The court supported this conclusion only by noting that monetary remedies under Title VII were limited to back pay and that other courts had found back pay awards to be taxable.(41)

While the phrase "back pay" was not mentioned during settlement negotiations, the court concluded that the original suit against the TVA was, in effect, an attempt to recover wage deficiencies suffered by the taxpayer as a result of sex discrimination. This fact, in conjunction with the fact that the settlement amounts were based on pay rates and length of service, led the court to conclude that back pay was awarded. The court therefore held that, although the settlement was the result of a personal injury dispute, the amount received by the taxpayer was taxable.

* Sixth Circuit rules back pay is excludible

The Sixth Circuit applied a strict nature of the claim test to the settlement award. In the court's words, Sec. 104(a)(2) requires "an examination of the nature of the injury to determine whether the injury and claim are personal and tort-like in nature, and not whether the consequences of the injury resulted in an award of compensatory damages or damages for back pay."(42) The court's analysis of case law addressing the nature of Title VII offenses led it to conclude that a sex discrimination action under that statute was of a tort-type nature. Having found the requisite "personal injury," the court held the settlement award to be excludible and reversed the district court's decision.

The IRS had argued that Title VII actions should be distinguished from actions under other antidiscrimination statutes because Title VII did not provide for remedies of compensatory and punitive damages while such damages were available under the other statutes. The Sixth Circuit found the IRS's position a misstatement of the proper inquiry for Sec. 104(a)(2) excludability (i.e., the nature of the claim asserted) and rejected the argument. The IRS had also argued that the failure to tax back pay awards would put an injured party in a better position (taxwise) than if the discrimination had not occurred. The court rejected this argument by noting that discriminated parties suffer noncompensatory injuries (e.g., indignation) and that damages arising from such injuries should be treated the same as physical injury damages that are excludible and often determined with reference to lost income.

* Supreme Court rules Title VII back pay is taxable

The Supreme Court concluded that damages awarded on the basis of a Title VII claim are not excludible under Sec. 104(a)(2). The Court reached this conclusion while at the same time acknowledging that the proper inquiry into the excludability of damages under Sec. 104(a)(2) is the nature of the claim test. By focusing on the remedies available under Title VII cases, however, the Court was able to conclude that actions under that statute were not of a tort-type nature.

The Court noted that a statute like Title VII that provides a sole remedy in the form of back pay does not redress tort-type personal injuries. The absence of broad remedies led the Court to distinguish Title VII from other Federal antidiscrimination statutes that have consistently been found to redress tort-type injuries. The settlement award derived by the taxpayer was therefore held to be taxable and the Sixth Circuit's decision was reversed.

The Court rejected the taxpayer's contention that Congress's recent amendment of Title VII allowing for the recovery of compensatory and punitive damages indicated that actions under that statute were tort-type in nature. The Court refused to recognize the amendment since it was not effective for the taxpayer, but it did add that "Congress' decision to permit jury trials and compensatory and punitive damages under the amended act signals a marked change in its conception of the injury redressable by Title VII. ... "(43)(Emphasis added.)

* Analysis of the case

The Court's focus on the remedies afforded under Title VII is awkward given its immediate and explicit acceptance of the nature of the claim test as the proper inquiry required by Sec. 104(a)(2). The nature of the claim test, as applied by lower courts, defines a tort by examining the nature of the injury suffered by the taxpayer. By focusing on the remedies, instead of the underlying injury, the Court appears to be applying the consequence of the injury approach so frequently argued by the IRS in professional defamation cases and so overwhelmingly rejected in Roemer and its progeny.

The Court's decision should be read as being limited to Title VII actions filed before the effective date of the amendments incorporated in the Civil Rights Act of 1991. The Court's opinion clearly limits its holding to situations in which the "sole remedy" available under an asserted action is that of back wages. Additionally, the Court explicitly acknowledged that Title VII, as amended, redresses tort-type injuries.

While it is possible that the IRS will view the decision as holding back pay in all cases to be taxable, the decision should not be read as such. The Court's opinion holds that back pay awarded in (preamendment) Title VII actions is taxable because such actions are not of a tort-type nature. In cases in which back pay is awarded under a statute that also provides for other remedies, such as suits brought under Title VII (as amended) or the ADEA, this opinion may be of limited applicability. The Burke decision does not address the question of whether back pay damages awarded under a statute that provides for a tort-type injury are excludible under Sec. 104(a)(2). In fact, the Court's stated acceptance of the nature of the claim test implies that any damages, including any back pay, flowing from an action under a statute that redresses a tort-type injury are excludible. If Burke can be read as such, the IRS won the battle but certainly lost the war.

Planning Considerations

The nature of the claim determines whether damages received are excludible from gross income. When the damages are received for a tort or tort-type injury, the amounts received will not be subject to tax. Therefore, to the extent possible, it is essential to assert tort or tort-type claims in lieu of contractual claims. These disputes are often settled before litigation. The claims asserted in the original complaints and the language used in the settlement agreement are of critical importance when determining whether the amounts received will be excludible under Sec. 104(a)(2).

A court will be reluctant to give credence to personal injury claims that were not specifically noted in the settlement agreement,(44) and may refuse to give effect to a retroactive amendment of a settlement agreement when the purpose of the amendment is to include a personal injury claim.(45) Additionally, agreements that purport to settle a personal injury claim, when no such claim was asserted in the plaintiff's original complaint, may not be respected. Instead, greater emphasis will be placed on the documentary evidence associated with the original claim asserted by the injured party (e.g., legal documents filed in court prior to settlement).

When a lump-sum amount is to be received in return for the settlement of a broad range of claims, including both tort and nontort (e.g., contractual) claims, the agreement should specifically allocate the damages received to the various claims settled.(46) In the absence of any allocation, the taxpayer will have the burden of establishing the portion of the settlement amount that is allocable to the tort (i.e., personal injury) claim.

Conclusion

It is anticipated that the IRS will increase its scrutiny of any damages awarded as a result of an employment discrimination dispute. The Supreme Court ruled in Burke that the taxpayer had not suffered a personal injury because Title VII provided for no remedy other than back pay at that time. Since back pay is not a typical remedy for a personal (tort or tort-type) injury, the Court reasoned that Sec. 104(a)(2) should not apply. Therefore, it is settled that damages received under Title VII of the Civil Rights Act of 1964 (before amendment) are taxable.

There is concern that the IRS may assert that back pay awarded in any employment discrimination dispute is taxable. This may be an overly broad interpretation of Burke. The Court's ruling was predicated on the fact that under Title VII no remedies were available to the taxpayer other than back pay. However, the Civil Rights Act of 1991 amended Title VII to provide for compensatory and punitive damages in addition to back pay. Additionally, the Equal Pay Act of 1963, the Age Discrimination in Employment Act of 1967 and other antidiscrimination statutes also provide remedies in addition to back pay. Whether damages designated as back pay under these statutes will be excludible under Sec. 104(a)(2) as "personal injury damages" is an issue that has yet to be adequately resolved.

(1)Therese A. Burke, 112 Sup. Ct. 1867(1992)(69AFTR2d 92-1293, 92-1 USTC [paragraph] 50,254), rev'g 929 F2d 1119 (6th Cir. 1991) (67 AFTR2d 91-749, 91-1 USTC [paragraph] 50,175), rev'g and rem'g E.D. Tenn., 1990 (90-1 USTC 950,203). (2) The exclusion was first enacted in the Revenue Act of 1918, Section 213(b)(6) (predecessor of Sec. 104(a)(2)). The exclusion was enacted on the theory that personal injury damages represented a return of capital (and not income). See H. Rep. No. 767, 65th Cong., 2d Sess. 9-10 (1918). (3) Id. See also H. Rep. No. 1337, 83d Cong., 2d Sess. 15 (1954); S. Rep. No. 1622, 83d Cong., 2d Sess. 15-16 (1954). (4) Black's Law Dictionary, 5th ed. (St. Paul: West Publishing Co., 1979), at 1335. (5) James E. Bent, 87 TC 236, 248 (1986), aff'd, 835 F2d 67 (3d Cir. 1987)(61 AFTR2d 88-301, 88-1 USTC [paragraph] 9101). See also Christine A. Byrne, 883 F2d 211 (3d Cir. 1989)(64 AFTR2d 89-5430, 89-2 USTC [paragraph] 9500), rev'g and rem'g 90 TC 1000 (1988). (6) Dudley G. Seay, 58 TC 32 (1972), acq. 1972-2 CB 3. See also Burke, note 1. (7) See, e.g., Byrne, note 5. (8) Paul F. Roemer, Jr., 716 F2d 693 (9th Cir. 1983)(52 AFTR2d 83-5954, 83-2 USTC [paragraph] 9600), rev'g 79 TC 398 (1982). See also Elmer A. Madson, TC Memo 1988-325. (9) See, e.g., Howard A. Wirtz, TC Memo 1989-139; Joseph T. Watkins, 223 Ct. Cl. 721 (1980) (45 AFTR2d 80-1280, 80-1 USTC [paragraph] 9362). (10) Wade E. Church, 80 TC 1104 (1983). See, e.g., Dorothy M. Thompson, 89 TC 632 (1987), aff'd, 866 F2d 709 (4th Cir. 1989 (63 AFTR2d 89-677, 89-1 USTC [paragraph] 9164); Watkins, id. (11) Ana M. Metzger, 88 TC 834 (1987), aff'd in an unpublished opinion, 3d Cir., 1988. See also Madson, note 8. (12) See, e.g., Laszlo Fono, 79 TC 680 (1982); William A. Glynn, 76 TC 116 (1981), aff'd in an unpublished opinion, 1st Cir., 1982. (13) Nathan Agar, TC Memo 1960-21, aff'd, 290 F2d 283 (2d Cir. 1961)(7 AFTR2d 1423, 61-1 USTC [paragraph] 9457). (14) See, e.g., Byrne, note 5; Madson, note 8; Audre L. Kurowski, 917 F2d 1033 (7th Cir. 1990)(66 AFTR2d 90-5898, 90-2 USTC [paragraph] 50,585), aff'g TC Memo 1989-149. (15) See, e.g., Mason K. Knuckles, TC Memo 1964-33, aff'd, 349 F2d 610 (10th Cir. 1965)(16 AFTR2D 5515, 65-2 USTC [paragraph] 9629); Kurowski, id. (16) Nonphysical injuries to which the exclusion has been applied to shelter damages from taxation include alienation of affections (Rev. Rul. 74-77, 1974-1 CB 33), relinquishment of child custody rights (Rev. Rul. 74-77), breach of promise to marry (Mrs. Lyde McDonald, 9 BTA 1340 (1928), acq. VII-2 CB 26 (1928)), and certain annulment actions (IT 1852, II-2 CB 66 (1923), declared obsolete, Rev. Rul. 69-43,1969-1 CB310). Injuries resulting from personal embarrassment (see Seay, note 6) and emotional distress may also give rise to excludible damages (see Fono, note 12). (17) See Sol. Op. 132, I-1 CB 92 (1922), superseded by Rev. Rul. 74-77, id.; Rev. Rul. 58-418, 1958-2 CB 18, superseded by Rev. Rul. 85-98, 1985-2 CB 51. (18) Rev. Rul. 85-143, 1985-2 CB 55. (19) For a thorough review of the early case law in the area, see James E. Threlkeld, 87 TC 1294 (1986), aff'd, 848 F2d 81 (6th Cir. 1988)(61 AFTR2d 88-1285, 88-1 USTC [paragraph] 9370). (20) Roemer, note 8, 9th Cir., at 83-2 USTC 88,190. (21) Threlkeld, note 19, TC, at 1299. (22) See, e.g., Carmen Pistillo, TC Memo 1989-329, rev'd and rem'd, 912 F2d 145 (6th Cir. 1990)(66 AFTR2d 90-5448, 90-2 USTC [paragraph] 50,469); Frank E. Rickel, 92 TC 510 (1989), rev'd in part, 900 F2d 655 (3d Cir. 1990)(65 AFTR2d 90-800, 90-1 USTC [paragraph] 50,200). See also Willie B. Hodge, 64 TC 616 (1975). The court rejected the consequence of the injury approach to resolving the back pay issue in Burns P. Downey, 97 TC 150 (1991), a reviewed decision. See also Howard H. Keller, TC Memo 1991-373. (23) American Telephone and Telegraph Corp.'s $66 million settlement with 13,000 class action plaintiffs for alleged pregnancy discrimination (The Wall Street Journal, 7/18/91, at B6) and Northwest Airline's $20 to $40 million settlement with 10,000 class action plaintiffs for alleged race discrimination (The Wall Street Journal, 8/19/91, at B6). (24) 42 USC Section 2000e et seq. (25) 42 USC Section 2000e-2(a)(1). (26) 42 USC Section 2000e-(k). (27) 29 USC Section 621 et seq. (28) 29 USC Section 206 et seq. (29) 42 USC Section 2000e-5(g). (30) PL No. 102-166, Section 402(a). (31) Rev. Rul. 85-97, 1985-2 CB 50. (32) See, e.g., Rev. Ruls. 85-143, note 18; 78-176, 1978-1 CB 303; and 72-341, 1972-2 CB 32. (33) Downey, note 22 (ADEA back pay award excludible); Keller, note 22 (ADEA back pay award excludible); Bent, note 5 (42 USC Section 1983 violation of First Amendment right to freedom of speech back award based on back pay excludible). (34) Byrne, note 5 (Fair Labor Standards Act and state wrongful discharge back pay award excludible); Rickel, note 22 (ADEA back pay award excludible); Bent, note 5 (42 USC Section 1983 violation of First Amendment right to freedom of speech award based on back pay excludible). (35) Burke, note 1 (Title VII back pay award excludible); Pistillo, note 22 (ADEA back pay award excludible). (36) Sheldon L. Wulf v. City of Wichita, 883 F2d 842 (10th Cir. 1989) (42 USC Section 1983 violation of First Amendment right to freedom of speech back pay award excludible). But see John V. Sears v. The Atchison, Topeka & Santa Fe Railway Co., 749 F2d 1451 (10th Cir. 1984) (Title VII back pay award taxable). (37) Watkins, note 9 (Title VII back pay award taxable). (38) Thompson, note 10 (Title VII and EPA back pay award taxable). (39) Carl Johnston v. Harris County Flood Control District, 869 F2d 1565 (5th Cir. 1989) (Title VII back pay award taxable). (In the same case, however, the Fifth Circuit ruled that a 42 USC Section 1983 violation of First Amendment right to freedom of speech back pay award was excludible.) (40) Cleveland B. Sparrow, Sr., 949 F2d 434 (D.C. Cir. 1991)(69 AFTR2d 92-325, 91-2 USTC [paragraph] 50,567) (Title VII back pay award taxable), aff'g TC Memo 1989-315. (41) To support its conclusion, the district court relied primarily on the Tax Court's ruling in Thompson, note 10, which held that back pay awarded for an EPA action was taxable. (42) Burke, note 1, 6th Cir., at 91-1 USTC 87,711. (43) Burke, note 1, Sup. Ct., at 92-1 USTC 84,004, n. 12. (44) See, e.g., Knuckles, note 15. In some cases, a court may look to circumstances surrounding a settlement to arrive at the "implied language" of an agreement. See, e.g., Bent, note 5. (45) See Fono, note 12. (46) See, e.g., Metzger, note 11 (the agreement allocated the settlement amount one-half to wage claims and one-half to personal injury claims; the court concluded that at least one-half of the settlement amount was excludible).
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Author:Greenstein, Brian R.
Publication:The Tax Adviser
Date:Apr 1, 1993
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