Personal injury recoveries after Burke.

• Author: Waltz, Catherine M.
• Position: Awards to female victims of discrimination are taxable

Title VII of the Civil Rights Act of 1964 is one of several Federal statutes designed to eliminate invidious discrimination in the work place. The appropriate tax treatment under Sec. 104(a)(2) of recoveries under Title VII has given rise to much litigation in recent years. In fact, a split developed in the circuits over the proper resolution of this issue. Finally, in May 1992, the Supreme Court resolved this split when it held that recoveries won under Title VII by several female employees who were subject to employment-related sex discrimination were taxable; the recoveries did not constitute damages received on account of personal injuries (Burke, 112 Sup. Ct. 1867 (1992)).

At first blush, this decision seems far-reaching, given the wealth of discrimination lawsuits being brought under Title VII, as well as under the Age Discrimination Employment Act (ADEA), the Fair Labor Standards Act (FLSA) and comparable state laws. On further examination, however, it becomes clear that the Burke decision is a narrow one; although it resolves a conflict among the circuits with respect to the taxation of Title VII recoveries under the Civil Rights Act of 1964, it resolves little else. Quite to the contrary, the Court's opinion arguably provides taxpayer with firm footing on which to rest their claims that recoveries under Title VII, as amended by the Civil Rights Act of 1991, as well as claims under other Federal and state antidiscrimination laws, are not taxable under Sec. 104(a)(2).

Background

Sec. 104(a)(2) provides that gross income does not include "the amount of any damages received (whether by suit or agreement and whether as lump sums or periodic payments) on account of personal injuries or sickness." Regs. Sec. 1.104-1(c) explains that "damages received" means an amount received through prosecution of a legal suit or action based on tort or tort type rights, or through a settlement agreement entered into in lieu of such prosecution. Thus, the availability of a recovery in tort is generally the sine qua non for relief under Sec. 104(a)(2). A tort is generally a civil wrong (not including a breach of contract) for which a court will provide a remedy in the form of an action for damages.

In recent years, the courts have been called on to interpret what Congress meant in Sec. 104(a)(2) by the phase, "damages received ... on account of personal injury or sickness" in the context of a recovery for employment-related discrimination under Title VII...