Vol. 11, No. 3, Pg. 22. Taxing Discrimination Settlements (OUCH! That 1099 hurts!).

• Author: By Edwin L. Turnage

South Carolina Lawyer

1999.

Vol. 11, No. 3, Pg. 22.

Taxing Discrimination Settlements (OUCH! That 1099 hurts!)

22Taxing Discrimination Settlements (OUCH! That 1099 hurts!)By Edwin L. TurnageSettling a Title VII discrimination action requires careful consideration of tax issues. Is the settlement taxable? And, to whom does the employer issue the 1099, if anyone?

The Internal Revenue Code, 26 U.S.C. § 104(a)(2), provides specifically for exclusion from income settlement payments "on account of personal physical injuries or physical sickness." (emphasis added) However, since 1996, settlements made to compromise "emotional distress" claims have been taxable.

Title VII discrimination claims may be for either or both types of damages. Because Title VII claims have this dual quality, the tax treatment of any settlement payments in discrimination cases must be made on a case-by-case basis.

24This article explains what the parties should consider when making a rational determination regarding the proper tax treatment of a discrimination settlement. It also addresses the issue of when an employer paying such a settlement should issue a 1099 to the ex-employee.

"COMPENSATORY DAMAGES" UNDER TITLE VII

Initially, Title VII claims did not include personal injury damages. But under the Civil Rights Act of 1991 (CRA) the law was expanded to permit recovery of "compensatory damages." Compensatory damages include physical injuries and physical sickness caused by the discrimination.

The amendment to Title VII that allowed recovery of compensatory damages provides as follows:

In an action brought by a complaining party under . . . the Civil Rights Act of 1964 [and] the Americans with Disabilities Act of 1990, .. . against a respondent who engaged in unlawful intentional discrimination[,] . . . the complaining party may recover compensatory and punitive damages . . . .

42 U.S.C. § 1981a(a)(2) (emphasis added). The statute also defines compensatory damages to include "future pecuniary losses, emotional pain, suffering, inconvenience, mental anguish, loss of enjoyment of life, and other nonpecuniary losses." 42 U.S.C. § 1981a(b)(3) (emphasis added).

The Legislative History of the CRA demonstrates that Congress intended, by this language, that compensatory damages would include physical injuries and physical sickness caused by the illegal...