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Back-pay award for (pre-1991 Title VII) discrimination is taxable.

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

There was conflict in the federal courts of appeal as to whether a back-pay award to settle a claim of employment discrimination under Title VII of the U.S. Civil Rights Act was taxable. The Sixth Circuit Court of Appeals held in Burke that such awards were made on account of personal injury, and therefore excludable, even though they replaced lost wages. Other appeals courts held such damages were not excludable. (See J of A, Feb.92, page 32, for a summary of the circuit court cases.)

To clear up this conflict, the U.S. Supreme Court agreed to hear Burke. The Court now has decided back-pay awards under Title VII are not excludable under section 104(a)(2). But this is not the end of the story, since Burke applies only to Title VII before Congress amended it in 1991.

The U.S. Supreme Court decision hinged on the definition of "personal injuries." Although there is no explanation of the term in the IRC or legislative history, the regulations say damages, to be excludable, must be received because of prosecution of some "tort or tort-type rights." Based on this analysis, the Court said, for the damages to be excludable, Therese Burke and the other claimants had to show Title VII redressed a "tort-like personal injury."

The Court found the pre-1991 Title VII did not redress a traditional tort-like injury, a decision based on the lack of variety of remedies available to employees before November 21, 1991, the effective date of the 1991 amendments. Only two basic remedies were available: back pay and court orders forcing an employer to hire, promote or rehire someone.

The Supreme Court contrasted these limited remedies with those usually available to plaintiffs suing because of some other physical or nonphysical personal injury: reimbursement of medical expenses, damages for pain and suffering, damages for emotional distress, damages for harm to reputation, etc. Thus, the Court held the damages did not fit section 104(a)(2)'s exclusion and were taxable.

Under Congress's 1991 changes to Title VII (via Public Law 102166), victims of intentional discrimination are entitled to a jury trial and to damages for a greater variety of losses, including lost future wages, emotional distress and other nonwage losses. A footnote in the decision hints the Court might have gone the other way had the settlement award occurred under the new version of Title VII.

The employees in Burke had won out-of-court settlements against their employer for discrimination based on gender. However, the Court's decision applies to all pre1991 Title VII claims, whether the claimed employment discrimination is based on gender, race, color, religion or national origin.

Note: For procedural reasons, the Court did not decide whether employers must withhold on pre1991 Title VII back-pay awards. However, it stands to reason withholding would be required, since the payments legally are income.

* Burke, et al. (S. Ct., 1992).
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Publication:Journal of Accountancy
Date:Aug 1, 1992
Words:501
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