NO EXCLUSION FOR AGE DISCRIMINATION DAMAGES, HOLDS HIGH COURT.

NO EXCLUSION FOR AGE DISCRIMINATION DAMAGES, HOLDS HIGH COURT.

A divided Supreme Court has ruled that no part of a man's recovery of back pay or liquidated damages under the Age Discrimination in Employment Act of 1967 (ADEA) is excludable from income. Background Erich Schleier worked for United Airlines Inc. until he was fired at age 60, pursuant to an established United policy. Schleier sued the airline under the ADEA; his case was consolidated with others in a class action, and he was awarded a settlement of $145,629. Half of Schleier's award was attributed to back pay, and half to liquidated damages. On his tax return for 1986, Schleier included in income the back-pay portion of the settlement, but excluded the portion attributed to liquidated damages. The IRS determined a deficiency, asserting that the liquidated damages portion was includable. The Tax Court ruled for Schleier, and the Fifth Circuit affirmed, relying on a circuit court decision that had, in turn, relied on the Supreme Court's decision in United States v. Burke, 504 U.S. 229 (1992). (For a summary of the Fifth Circuit's decision, see Tax Notes, July 11, 1994, p. 193; for the full text, see 94 TNT 130-9.) The Supreme Court granted certiorari, noting that "the Courts of Appeals have reached inconsistent conclusions as to the taxability of ADEA recoveries in general and of the United settlement in particular." The Majority The divided Supreme Court reversed the decisions of the Fifth Circuit and the Tax Court, concluding that damages received under the ADEA are not received "on account of personal injury or sickness." Justice John Paul Stevens rejected Schleier's assertion that the liquidated damages portion of his settlement "fits comfortably within the plain language of [section] 104(a)(2)'s exclusion." Citing Trans World Airlines Inc. v. Thurston, 469 U.S. 111 (1985), Justice Stevens noted that the Court had already concluded that "'Congress intended for liquidated damages to be punitive in nature,'" rather than compensatory. The Court opined that Schleier sought to circumvent the plain language of section 104(a)(2) by relying on reg. section 1.104-1(c), and contending "that an action to recover damages for a violation of the ADEA is 'based upon tort or tort type rights' as those terms are used in that regulation." Justice Stevens responded that "[t]he regulatory requirement that the amount be received in a tort type action is not a substitute for the statutory requirement that the amount be received 'on account of personal injuries or sickness.'" The High Court also rejected Schleier's contention that the Court's decision in Burke compelled the conclusion that the liquidated damages award was excludable. In Burke, the Court rejected a taxpayer's argument that her back-pay claim under the pre-1991 version of Title VII of the Civil Rights Act of 1964 was excludable from gross income. The decision rested on the conclusion that the claim was not based upon "tort or tort type relief." Applying Burke to the instant case, Justice Stevens stated that Schleier's "ADEA recovery is not based upon 'tort or tort type rights' as that term was construed in Burke." And, the Court noted, "the holding of Burke is narrower than [Schleier] suggests." In conclusion, Justice Stevens pointed out that the Court's "decision in Burke established two independent requirements that a taxpayer must meet before a recovery may be excluded under [section] 104(a)(2)" -- that the underlying cause of action was "based upon tort or tort type rights," and that the damages were received "on account of personal injuries or sickness." The majority concluded that Schleier had not satisfied either of these requirements. The Dissent Justice Sandra Day O'Connor wrote a dissenting opinion, in which Justice Clarence Thomas joined. Justice David Souter joined in Part II of the dissent. "Age discrimination inflicts a personal injury," Justice O'Connor asserted in Part I of the dissent. She argued that, "[u]nless the Court reads [section] 104(a)(2) to permit exclusion only of damages received for tangible injuries (i.e., physical and mental injuries) -- a reading rejected by eight Members of the Court in Burke . . . -- the inescapable conclusion is that ADEA damage awards are excludable." In Part II, Justice O'Connor argued that "ADEA damages should be excludable from taxable income under our precedents."

Schleier v. Commissioner, 26 F.3d 1119 (5th Cir. 1994) (For a summary, see Tax Notes, July 11, 1994, p. 193; for the full text, see 94 TNT 130-9.)

A divided Supreme Court has ruled that no part of a man's recovery of back pay or liquidated damages under the Age Discrimination in Employment Act is excludable, as the damages were not received "on account of personal injury or sickness."

A divided Supreme Court has ruled that no part of a man's recovery of back pay or liquidated damages under the Age Discrimination in Employment Act of 1967 (ADEA) is excludable from income. Background Erich Schleier worked for United Airlines Inc. until he was fired at age 60, pursuant to an established United policy. Schleier sued the airline under the ADEA; his case was consolidated with others in a class action, and he was awarded a settlement of $145,629. Half of Schleier's award was attributed to back pay, and half to liquidated damages. On his tax return for 1986, Schleier included in income the back-pay portion of the settlement, but excluded the portion attributed to liquidated damages. The IRS determined a deficiency, asserting that the liquidated damages portion was includable. The Tax Court ruled for Schleier, and the Fifth Circuit affirmed, relying on a circuit court decision that had, in turn, relied on the Supreme Court's decision in United States v. Burke, 504 U.S. 229 (1992). (For a summary of the Fifth Circuit's decision, see Tax Notes, July 11, 1994, p. 193; for the full text, see 94 TNT 130-9.) The Supreme Court granted certiorari, noting that "the Courts of Appeals have reached inconsistent conclusions as to the taxability of ADEA recoveries in general and of the United settlement in particular." The Majority The divided Supreme Court reversed the decisions of the Fifth Circuit and the Tax Court, concluding that damages received under the ADEA are not received "on account of personal injury or sickness." Justice John Paul Stevens rejected Schleier's assertion that the liquidated damages portion of his settlement "fits comfortably within the plain language of [section] 104(a)(2)'s exclusion." Citing Trans World Airlines Inc. v. Thurston, 469 U.S. 111 (1985), Justice Stevens noted that the Court had already concluded that "'Congress intended for liquidated damages to be punitive in nature,'" rather than compensatory. The Court opined that Schleier sought to circumvent the plain language of section 104(a)(2) by relying on reg. section 1.104-1(c), and contending "that an action to recover damages for a violation of the ADEA is 'based upon tort or tort type rights' as those terms are used in that regulation." Justice Stevens responded that "[t]he regulatory requirement that the amount be received in a tort type action is not a substitute for the statutory requirement that the amount be received 'on account of personal injuries or sickness.'" The High Court also rejected Schleier's contention that the Court's decision in Burke compelled the conclusion that the liquidated damages award was excludable. In Burke, the Court rejected a taxpayer's argument that her back-pay claim under the pre-1991 version of Title VII of the Civil Rights Act of 1964 was excludable from gross income. The decision rested on the conclusion that the claim was not based upon "tort or tort type relief." Applying Burke to the instant case, Justice Stevens stated that Schleier's "ADEA recovery is not based upon 'tort or tort type rights' as that term was construed in Burke." And, the Court noted, "the holding of Burke is narrower than [Schleier] suggests." In conclusion, Justice Stevens pointed out that the Court's "decision in Burke established two independent requirements that a taxpayer must meet before a recovery may be excluded under [section] 104(a)(2)" -- that the underlying cause of action was "based upon tort or tort type rights," and that the damages were received "on account of personal injuries or sickness." The majority concluded that Schleier had not satisfied either of these requirements. The Dissent Justice Sandra Day O'Connor wrote a dissenting opinion, in which Justice Clarence Thomas joined. Justice David Souter joined in Part II of the dissent. "Age discrimination inflicts a personal injury," Justice O'Connor asserted in Part I of the dissent. She argued that, "[u]nless the Court reads [section] 104(a)(2) to permit exclusion only of damages received for tangible injuries (i.e., physical and mental injuries) -- a reading rejected by eight Members of the Court in Burke . . . -- the inescapable conclusion is that ADEA damage awards are excludable." In Part II, Justice O'Connor argued that "ADEA damages should be excludable from taxable income under our precedents."

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NO EXCLUSION FOR AGE DISCRIMINATION DAMAGES, HOLDS HIGH COURT.