Two conflicting decisions on excludability of age discrimination damages.

The Ninth and the Seventh Circuit Courts of Appeals recently came to opposite conclusions regarding the excludability of back pay and liquidated damages received to settle claims under the Age Discrimination in Employment Act (ADEA).

In Schmitz, the Ninth Circuit said a 1986 award in settlement of a suit under the ADEA was excludable under Internal Revenue Code section 104(a)(2), which excludes damages received "on account of personal injuries...."

The Ninth Circuit applied the U.S. Supreme Court's test for determining whether a legal cause of action is "tor-like," rendering the damages awarded under it excludable. Under this test, articulated in 1992 in Burke, the cause of action created by the ADEA had to "evidence...a tort-like conception of injury and remedy."

The Ninth Circuit's inquiry centered on whether the ADEA's available remedies were of sufficient scope to qualify as tort-like. The Ninth Circuit found that the ADEA, which provides for jury trials and for liquidated damages, met the Supreme Court's requirements. The IRS claimed the ADEA's liquidated damages had a solely punitive purpose and therefore were not broad enough in scope to constitute a tort-like remedy. The court disagreed, finding the liquidated damages had both a compensatory and a punitive purpose.

In the Seventh Circuit case, Downey, the court held a 1985 settlement of an ADEA suit was not excludable under section 104(a)(2).

The Seventh Circuit said the liquidated damages provided for by the ADEA "do not compensate for the intangible elements of a personal injury." Therefore, the court held the ADEA remedies were insufficiently tort-like and the damages were not excludable.

Note: In a related development, the IRS is expected to issue publication 957, which will tell employers how to report court-or agencyawarded back pay to the Social Security Administration.