Steering Committee

Connie N. Bertram
Denise M. Clark
Nicholas W. Clark
Judith M. Conti
Molly A. Elkin
Louis Lopez
Jonathan R. Mook
Edward H. Passman
Phillis Payne

Principal Author

Edward H. Passman

Note: The views expressed herein represent only those of the Labor and Employment Law Section of the District of Columbia Bar and not those of the D.C. Bar or of its Board of Governors.

Comments of the Labor and Employment Law Section of the District of Columbia Bar on Support for H.R. 840/S. 917—"Civil Rights Tax Relief Act" to be filed with Charles E. Grassley, Chairman and Max Baucus, Ranking Minority Member of the Senate Finance Committee, and William M. Thomas, Chairman, and Charles B. Rangel, Ranking Minority Member of the House Ways and Means Committee

One-Page Summary for D.C. Bar Reviewers
In the Small Business Act of 1996, which increased the minimum wage, Congress made taxable all damage awards not based on "physical injuries or physical sickness." Unlike personal injury awards for wages and physically-based emotional distress, employment discrimination awards involving either back wages or non-physical injuries (including emotional distress) are now taxable, regardless of how the injuries are designated in the award or settlement agreement. This discriminates against both parties involved in civil rights cases. While damages received for psychological injuries stemming from a barroom brawl or a slip-and-fall, often caused simply by negligence, are tax free, damages to compensate for the very same types of psychological injury caused by intentional unlawful employment discrimination, are not. As a result, the government and attorneys often take a higher percentage of the award than the person whose rights were violated.

The Civil Rights Tax Relief Act (CRTRA) would eliminate taxation of emotional distress awards in discrimination cases by excluding such damages completely from taxable gross income. If enacted, the CRTRA would prevents workers subjected to illegal discrimination from paying higher taxes on lump-sum wage awards. It also greatly enhances the chances of settlements in discrimination cases, as often employees will insist upon a higher sum to compensate them for the additional taxes to be paid. Furthermore, it would also benefit employers who would not have to continue to pay increased amounts in settlement agreements because of the employees’ tax liability.

The CRTRA also provides for income averaging of back pay awards that would permit those individuals recovering back wage awards to be taxed over the number of years for which the award was designed to compensate. This would eliminate the requirement that awards be taxed in the year received which may place employees in a higher tax bracket than would have applied if they had received their wages over the years they had worked. At present, income averaging is not allowed.

In addition, the CRTRA would eliminate the taxation of attorney fees awards by eliminating attorney fees from the individual’s gross income. At present, employees who bring civil rights cases can also be taxed on the portion of the award paid to their attorney as fees even though the attorneys are also taxed on that amount as well. Under current law, deductions for attorney fees often trigger the alternative minimum tax, making more of the award, including the attorney fees, taxable to the individual whose rights were violated.

The Public Statement of the D.C. Bar Labor and Employment Law Section supports the passage of the CRTRA.

The views expressed herein represent only those of the Labor and Employment Law Section of the District of Columbia Bar and not those of the D.C. Bar or of its Board of Governors.