HIGH COURT SAYS TITLE VII BACK PAY AWARDS ARE NOT EXCLUDABLE UNDER SECTION 104.

HIGH COURT SAYS TITLE VII BACK PAY AWARDS ARE NOT EXCLUDABLE UNDER SECTION 104.

In 1984, a female employee of the Tennessee Valley Authority filed a Title VII action alleging that TVA had discriminated in the payment of salaries on the basis of sex. Therese Burke was one of the other employees represented when their union intervened. The complaint alleged that TVA had increased the salaries of employees in male-dominated pay schedules, without a corresponding increase in female-dominated schedules. In fact, the complaint also alleged that TVA lowered salaries in some female-dominated schedules. The parties ultimately reached a settlement, and TVA agreed to pay more than $5 million to the affected employees. TVA withheld federal income taxes on the amounts allocated, and Burke filed a refund claim for the taxes withheld. The IRS disallowed the claim. Burke filed suit, arguing that the settlement payments should be excluded from gross income under section 104(a)(2) as "damages received on account of personal injuries." The district court rejected the claim, holding that the settlement proceeds represented taxable back wages. A divided Sixth Circuit reversed, holding that the payments were excludable because the nature of the injury was tortlike. The dissent in the Sixth Circuit agreed with the lower court's reasoning. Holding that back pay awards received by claimants in Title VII cases are not excludable from gross income under section 104(a)(2), the Supreme Court reversed the Sixth Circuit. Justice Blackmun, writing for the majority, agreed with the appellate court that the term "personal injuries," as used in section 104, refers to tortlike injuries. Reg. section 1.104-1(c). The Court determined, however, that the remedies available under Title VII distinguish sex discrimination claims from those under other antidiscrimination statutes. Justice Blackmun reasoned that Title VII provides only for redress of "legal injuries of an economic character," and does not allow for compensatory and punitive damages, which are generally available under traditional tort law. This scheme, noted the majority, does not provide remedies for pain and suffering, emotional distress, or "any of the other traditional harms associated with personal injury." The Court concluded that Congress decided to recompense Title VII plaintiffs only with backwages that, "if paid in the ordinary course, would have been fully taxable." Justices Scalia and Souter wrote concurring opinions. Justice Scalia rejected totally the definition of "personal injuries" based on tort rights, as provided by regulation section 1.104-1(c). Justice Scalia explained that "personal injuries," especially when considered with its companion term "sickness," refers only to injuries to physical or mental health. Justice Scalia added that Title VII deals only with legal injuries, thus precluding the possibility that settlement payments can be "on account of personal injuries." Justice Souter noted that back pay "is quintessentially a contractual measure of damages" and that therefore it does not fall "on the tort side of the line." Justice O'Connor filed a dissenting opinion, joined by Justice Thomas, stating that "the remedies available to Title VII plaintiffs do not fix the character of the right they seek to enforce." The dissenters would have focused on "the nature of the statute and the type of claim brought under it." Justice O'Connor wrote that monetary awards in Title VII cases act like damages in tort suits in that the awards serve a public purpose rather than protecting an individual interest. Justice O'Connor pointed out that the Court has previously likened discrimination claims (under 42 U.S.C. sections 1983 and 1981) to tort suits without suggesting that the comparison turns on the monetary relief available. The dissenters concluded that rights asserted under Title VII "are just as tortlike as the rights asserted by plaintiffs in actions brought under sections 1981 and 1983."

Burke v. United States, 929 F.2d 1119 (1991)

The Supreme Court has held that back pay awards in settlement of Title VII claims are not excludable from gross pay under section 104(a)(2).

In 1984, a female employee of the Tennessee Valley Authority filed a Title VII action alleging that TVA had discriminated in the payment of salaries on the basis of sex. Therese Burke was one of the other employees represented when their union intervened. The complaint alleged that TVA had increased the salaries of employees in male-dominated pay schedules, without a corresponding increase in female-dominated schedules. In fact, the complaint also alleged that TVA lowered salaries in some female-dominated schedules. The parties ultimately reached a settlement, and TVA agreed to pay more than $5 million to the affected employees. TVA withheld federal income taxes on the amounts allocated, and Burke filed a refund claim for the taxes withheld. The IRS disallowed the claim. Burke filed suit, arguing that the settlement payments should be excluded from gross income under section 104(a)(2) as "damages received on account of personal injuries." The district court rejected the claim, holding that the settlement proceeds represented taxable back wages. A divided Sixth Circuit reversed, holding that the payments were excludable because the nature of the injury was tortlike. The dissent in the Sixth Circuit agreed with the lower court's reasoning. Holding that back pay awards received by claimants in Title VII cases are not excludable from gross income under section 104(a)(2), the Supreme Court reversed the Sixth Circuit. Justice Blackmun, writing for the majority, agreed with the appellate court that the term "personal injuries," as used in section 104, refers to tortlike injuries. Reg. section 1.104-1(c). The Court determined, however, that the remedies available under Title VII distinguish sex discrimination claims from those under other antidiscrimination statutes. Justice Blackmun reasoned that Title VII provides only for redress of "legal injuries of an economic character," and does not allow for compensatory and punitive damages, which are generally available under traditional tort law. This scheme, noted the majority, does not provide remedies for pain and suffering, emotional distress, or "any of the other traditional harms associated with personal injury." The Court concluded that Congress decided to recompense Title VII plaintiffs only with backwages that, "if paid in the ordinary course, would have been fully taxable." Justices Scalia and Souter wrote concurring opinions. Justice Scalia rejected totally the definition of "personal injuries" based on tort rights, as provided by regulation section 1.104-1(c). Justice Scalia explained that "personal injuries," especially when considered with its companion term "sickness," refers only to injuries to physical or mental health. Justice Scalia added that Title VII deals only with legal injuries, thus precluding the possibility that settlement payments can be "on account of personal injuries." Justice Souter noted that back pay "is quintessentially a contractual measure of damages" and that therefore it does not fall "on the tort side of the line." Justice O'Connor filed a dissenting opinion, joined by Justice Thomas, stating that "the remedies available to Title VII plaintiffs do not fix the character of the right they seek to enforce." The dissenters would have focused on "the nature of the statute and the type of claim brought under it." Justice O'Connor wrote that monetary awards in Title VII cases act like damages in tort suits in that the awards serve a public purpose rather than protecting an individual interest. Justice O'Connor pointed out that the Court has previously likened discrimination claims (under 42 U.S.C. sections 1983 and 1981) to tort suits without suggesting that the comparison turns on the monetary relief available. The dissenters concluded that rights asserted under Title VII "are just as tortlike as the rights asserted by plaintiffs in actions brought under sections 1981 and 1983."

Section 104 -- Damage Awards/Sick Pay

Search Connectors

Retrieving Documents With a Tax Analysts’ Citation:

Field Restricted Searching:

HIGH COURT SAYS TITLE VII BACK PAY AWARDS ARE NOT EXCLUDABLE UNDER SECTION 104.