Supreme Court says age discrimination damages are taxable.The U.S. Supreme Court recently said liquidated damages Monetary compensation for a loss, detriment, or injury to a person or a person's rights or property, awarded by a court judgment or by a contract stipulation regarding breach of contract. stemming from an age discrimination claim filed under the Age Discrimination in Employment Act The Age Discrimination in Employment Act of 1967, Pub. L. No. 90-202, 81 Stat. 602 (Dec. 15, 1967), codified as Chapter 14 of Title 29 of the United States Code, through (ADEA), prohibits employment discrimination against persons 40 years of age or older in the United States (see ). (ADEA ADEA Age Discrimination in Employment Act of 1967 ADEA American Dental Education Association (Washington, DC) ADEA Association for the Development of Education in Africa (RSA) ) are not tax-free. Schleier, an airline pilot, was fired because he reached age 60. He brought an age discrimination claim against his employer under ADEA, which gives victims various remedies including recovery of lost wages and payment of liquidated damages. Schleier's suit was settled and he received both liquidated damages and back pay. He did not report the liquidated damages on his tax return. Internal Revenue Code The Internal Revenue Code is the body of law that codifies all federal tax laws, including income, estate, gift, excise, alcohol, tobacco, and employment taxes. These laws constitute title 26 of the U.S. Code (26 U.S.C.A. § 1 et seq. section 104(a) excludes from gross income "damages received...on account of personal injuries or sickness." The Internal Revenue Service claimed the liquidated damages were not excludable under the personal injuries provision. The Tax Court said the liquidated damages were excludable under the Supreme Court's test in the Burke case. In Burke, the Court said that for damages to be excludable under the personal injuries provision, the underlying claim had to be based on "tort tort, in law, the violation of some duty clearly set by law, not by a specific agreement between two parties, as in breach of contract. When such a duty is breached, the injured party has the right to institute suit for compensatory damages. or tort-type rights." The Tax Court said the ADEA liquidated damages were excludable because the ADEA provided certain tort-type remedies. The Fifth Circuit Court of Appeals affirmed af·firm v. af·firmed, af·firm·ing, af·firms v.tr. 1. To declare positively or firmly; maintain to be true. 2. To support or uphold the validity of; confirm. v.intr. , relying on Burke. The case then went to the Supreme Court. Result: For the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. . Liquidated damages received under the ADEA are not excludable, based on both the plain language of the code's exclusion and the test in Burke. Recovery of liquidated damages is not "on account of" any personal injury as the code requires. Further, the liquidated damages are not based on "tort or tort-type rights." The ADEA does not provide for such rights in the traditional sense contemplated by the Supreme Court. The Court said the Tax Court had read too much into Burke, and meeting its requirements was not a substitute for fitting within the statute's plain language. Note: The Court said a 1993 IRS decision on discrimination damages, revenue ruling 93-88, might not be valid. That ruling said certain gender and race discrimination damages would be excludable. An IRS spokesperson said the IRS will take another look at the ruling. * Schleier, Sup. Ct., 1995. |
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