Rev. Rul. 78-176

Advice has been requested whether certain payments made by a company in partial settlement of a suit brought under Title VII of the Civil Rights Act of 1964 are wages for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages (chapters 21, 23, and 24, respectively, subtitle C, Internal Revenue Code of 1954). The recipients of the payments were never employed by the company.

After the initiation of civil actions against the company alleging that it had engaged in racially discriminatory employment practices or a pattern and practice of racial discrimination in employment in violation of Title VII of the Civil Rights Act of 1964 and 42 U.S.C. 1981 (1970), the company agreed to a partial resolution of the cases by entry of a joint Consent Decree. Pursuant to the Consent Decree the company is required to make payments to affected class members.

Affected class members are defined in the Consent Decree to include all applicants who were refused employment by the company on the basis of racial discrimination during the period July 2, 1965 (effective date of Title VII) to the date of the filing of the Consent Decree.

The payments made under the Consent Decree represent payments to applicants for employment who allegedly suffered economic loss as a result of a wrongful refusal to hire based on racially discriminatory practices. The amount payable to each such individual represents an agreed amount to compensate for the loss of prospective employment.

Section 3121(a) of the Federal Insurance Contributions Act and section 3306(b) of the Federal Unemployment Tax Act define the term "wages," with certain exceptions not here material, as "all remuneration for employment." Section 3401(a) of the Code, relating to the withholding of income tax, defines "wages" as "all remuneration * * * for services performed by an employee for his employer * * *."

Sections 3121(b) and 3306(c) of their respective Acts provide that the term "employment" generally means any service, of whatever nature, performed by an employee for an employer. In Social Security Board v. Nierotko, 327 U.S. 358 (1946), the Supreme Court of the United States held that back pay awarded by the National Labor Relations Board to a wrongfully discharged employee was wages for social security purposes.

The Supreme Court reasoned that however restrictively the Social Security Act could be interpreted if read alone, when read in conjunction with the National Labor Relations Act, wages under the former act included back pay under the latter. Therefore, inasmuch as Congress intended, under the National Labor Relations Act, that back pay could be ordered by the Board in order to make the victim whole, complete reparation would include the wage credits under the Social Security Act.

Congress had a similar intent with respect to the compensatory payments provided under Title VII of the Civil Rights Act of 1964, even where the wrongful discrimination of the putative employer precluded the existence of an employer-employee relationship under the usual rules to be applied in determining that relationship under the Federal Insurance Contributions Act.

Accordingly, the payments made by the company under the Consent Decree to the affected class members are "wages" for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages.