High court to rule on taxation of damage awards

November 15, 1994|By Lyle Denniston | Lyle Denniston,Washington Bureau of The Sun

WASHINGTON -- Workers who collect money on their claims of age bias or other forms of discrimination on the job will have to await word from the Supreme Court on whether they must pay federal taxes on those awards.

Lower federal courts are in dispute on that issue, leading the justices to vote yesterday to settle it, in a case involving a tax-deduction claim of more than $140,000 by a former United Airlines pilot.

The Internal Revenue Service took the issue to the Supreme Court, arguing that the outcome of the case would affect tax reporting on verdicts not only in age-bias cases but also in a variety of other discrimination cases under federal and state law.

The result, the IRS said, will affect the tax liability of many thousands of individuals.

The issue is whether back-pay awards to discrimination victims, and extra-damage awards that sometimes are tacked on to back-pay verdicts, are taxable income under federal law. The U.S. Tax Court has ruled that they are not, but federal appeals courts have reached conflicting rulings on it.

The legal question turns on whether such awards are considered to be awards for personal injury or a form of compensation for legal harms suffered. Under federal tax law, personal injury awards are not taxable.

In the test case the Supreme Court agreed to review, Erich E. Schleier, a Texas man, wanted to exempt from his federal taxable income a total of $145,629 he had received when he and other former United pilots settled an age-bias dispute. The pilots had been forced to retire when they reached age 60, and they claimed that the requirement violated their rights under the Age Discrimination in Employment Act.

Half Mr. Schleier's award was for back pay; the other half was for special damages based on the conclusion that United's violation of the law was a "willful" one. The IRS demanded that he pay taxes on those sums, but the Tax Court ruled in his favor.

A Supreme Court ruling on the case is expected by next summer.

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