Restoring tax fairness for plaintiffs.

For the past three Congresses, lawmakers on both sides of the aisle have recognized the need to address the implications of a seven-year-old law that imposed federal taxes on all punitive damages awards and on compensatory damages in specific cases. This is the flirt Congress, however, in which a bill to modify that law has made significant progress toward enactment.

The Small Business Job Protection Act of 1996 (Pub. L. No. 104-188) provided tax relief for small businesses. To compensate for the resulting revenue loss, the act also included miscellaneous provisions imposing new taxes, including one provision that penalizes plaintiffs.

Before the act was passed, a plaintiff who received a damages award arising from a personal injury claim, whether by jury verdict of settlement, could deduct the amount of that award from his or her gross income.

Under the new law, punitive damages awarded in all civil cases became taxable, as did compensatory damages awarded in personal injury claims not related to physical injury or sickness. That meant that awards arising from claims such as slander, libel, sexual harassment, and employment discrimination became taxable income.

As a result, the act allows the IRS to, in essence, "double dip" on attorney fees in affected cases: A plaintiff is taxed on the full amount of the award, even when a portion of that award must be paid to his or her attorney. The IRS also collects taxes on the fee from the attorney.

Earlier this year, Sen. Susan Collins (R-Me.) introduced the Civil Rights Tax Relief Act of 2003 (S. 557) to restore the deductibility of compensatory damages in discrimination cases. The bill defines "unlawful discrimination" as any act that is illegal under any of more than a dozen specified federal statutes or under any state, local, of common law civil-rights-enforcement law. Collins's bill would, among other things, fix the double-dipping glitch in these cases.

Similar legislation was introduced in both chambers, without success, in each of the previous two Congresses.

Case in point

When Collins introduced this year's version of the bill, she recounted a case brought to her attention by ATLA member David Webbert. Webbert represented a plainliff who successfully challenged an employer's policy of discriminating against workers with a certain type of disability. As a result of the lawsuit, the employer's policy was declared illegal and was halted, but the plaintiff received no monetary damages. Still, the defendant's insurer paid legal fees to the plaintiff. That amount was taxable, to both the Plaindff and the attorney.

In other words, Collins said, "Under current law, a plaintiff can actually be penalized financially for bringing a meritorious case against a company's discriminatory policies."

Two months after Collins introduced her bill, a modified version was added to the Senate Finance Committee's version of the Jobs and Growth Tax Relief and Reconciliation Act (the tax-cut bill). The committee, chaired by Sen. Charles Grassley (R-Iowa), a cosponsor of S. 557, did not restore the full deductibility of damages in discrimination lawsuits, as S. 557 would do, but it at least sought to eliminate the double taxation of attorney fees.

As the finance committee noted in its "technical explanation of provisions approved":

   The committee recognizes that civil rights
   laws provide important protections and
   remedies to victims of unlawful discrimination.
   The committee understands that
   amounts received by individuals on account
   of claims of unlawful discrimination may
   include attorney fees and costs and that
   such attorney fees and costs may be larger
   than the actual award. The committee believes
   that it is not appropriate for individuals
   to be subject to tax on the portion of
   amounts received on account of unlawful
   discrimination which is attributable to such
   fees and costs.

The double-taxation fix was passed by the full Senate in May, without controversy, as part of the tax bill. Unfortunately, the conference committee appointed to reconcile the House and Senate versions of the bill deleted these provisions, and the bill was ultimately enacted without them.

Chance for passage remains

Despite that disappointment, legislation to address the deductibility of damages in discrimination cases remains very much alive. Collins's bill, which has strong bipartisan support, is pending in the Senate Finance Committee. On the House side, Rep. Deborah Pryce (R-Ohio) has introduced an identical bill (H.R. 1155), which at this writing had already attracted a bipartisan mix of 88 cosponsors, 31 of them Republicans.

The bill has also garnered bipartisan backing beyond Capitol Hill. Civil rights advocates, business groups, and legal organizations--including ATLA and the National Employment Lawyers Association--are all working for the bill.

KRISTIN LOIACONO is associate director for media outreach and coalition development in ATLA's Media Relations department.