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Are age discrimination awards excludable? Two opinions.

Under Internal Revenue Code section 104(a)(2), damages received for personal injuries are excludable from gross income.

The U.S. Supreme Court decided in Burke (S. Ct., 1992) that back pay awards to settle employment discrimination claims under title VII of the federal Civil Rights Act (before its amendment by Congress in 1991) are not excludable under section 104(a)(2).

The Supreme Court decision hinged on the definition of personal injuries. Although the term is not explained in the code or in the legislation history, the regulations say damages must be received because of prosecution of some "tort or tort-type rights" to be excludable. Based on this analysis, the Court said title VII had to redress a tort-like personal injury for the damages to be excludable.

The Court found title VII, before its 1991 amendment, did not redress a traditional tort-like injury. Its decision was based on the lack of variety of remedies available to employees before November 21, 1991, the effective date of the 1991 amendment to title VII. Only two basic remedies were available: (1) back pay and (2) court orders forcing an employer to hire, promote or rehire someone. The Court contrasted these limited remedies to those usually available to plaintiffs suing because of other physical or nonphysical personal injuries: medical expense reimbursements and damages for pain and suffering, emotional distress, harm to reputation or other injuries. Thus, the Court held the damages were not excludable under section 104(a)(2).

The Supreme Court decision left unanswered the question of whether damages or settlements under the federal Age Discrimination in Employment Act (ADEA) were excludable.

Two court decisions have applied the Burke analysis to damages under ADEA and reached opposite decisions.

In one case, Downey, an airline pilot, sued his former employer under ADEA. He received a settlement, one-half of which was called liquidated damages" and the other half "nonliquidated damages." The Tax Court held before Burke that all the damages were excludable under section 104(a)(4). The Internal Revenue Service asked it to reconsider its opinion in light of Burke. It did and decided the damages were excludable. The court said the remedies provided for under ADEA, which include compensation for unpaid wages and liquidated damages (the latter can serve as punitive damages) were sufficiently tort-like to make damages excludable under Burke. * Downey (100 TC no. 40.)

In another case, Maleszewski received a settlement from Chrysler Corp. for an ADEA claim. The settlement was divided into three parts: salary, pension and interest. The federal District Court of Northern Florida said the damages were not excludable. It said regardless of the liquidated damages provision, ADEA did not redress traditional tort-like rights normally accompanied by a broad range of compensatory relief. * Maleszewski (DC N. Fla., 1993).
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Sep 1, 1993
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