Civil Rights Tax Relief Act

The Bill

Executive Summary, J. Blair Hayes

On August 20, 1996, a little noticed rider to the Small Business Protection Act changed the way compensation awarded in discrimination and retaliation cases would be taxed.  For the first time, emotional distress damages would be taxed, and all back pay and front pay awards would be taxed as ordinary income in the taxable year received.  This change in the tax code overturned the decision of the Tax Court in Threkeld v. Commissioner, 87 T.C. 1294, 1308 (1988) which excluded from taxation emotional distress awards in discrimination cases.

Under the present tax code, damages received as a result of simple negligence such as a slip and fall or barroom brawl are tax free.  However, damages received as a result of the very same type of psychological injury caused by intentional discrimination are taxable.  This change has had a chilling effect on potential plaintiffs because the concept of a "make whole" remedy is now impossible.

The cost of lititation for plaintiffs and defendants has risen substantially because successful litigants want higher settlement awards to cover the tax implications.  The business community supports the Civil Rights Tax Relief Act because settlements will be easier to achieve and, as a result, will reduce the need for protracted and expensive trials.

On April 9, 2002, the Washington, D.C. Council unanimously passed the Civil Rights Fairness Act.  The Act exempts from taxation compensation for emotional distress damages (up to 9% in the District of Columbia), allows income averaging on back pay and front pay awards, and eliminates the double taxation of attorneys' fees by no longer taxing such awards to clients.  In short, every facet of H.R. 840 and S. 917, the federal Civil Rights Tax Relief Act, should soon be the law for state taxation of awards in the District of Columbia.  Mayor Anthony Williams signed the bill into law on August 5, 2002.

Clearly, this bill is a 'win-win" for successful plaintiffs and defendants, and the strong bipartisan support in the U.S. Congress reflects this awareness.  Passage of the Civil Rights Tax Relief Act of 2003 will bring justice to the U.S. Tax Code.

Endorsing Organizings

AARP, ABA Labor and Employment Section, American Civil Liberties Union, American Small Business Alliance, Association of the Bar of the City of New York, Broward County (FL) Human Rights Board, Cincinnati (OH) Bar Association, The Chubb Corporation, Connecticut Business and Industry Association, Counsel of Insurance Agents and Brokers, DC Bar's Labor and Employment Section, Government Accontability Project (GAP), The Impact Fund, Leadership Conference on Civil Rights, Massachusetts Bar Association, Metro Hartford (CT) Chamber of Commerce, Montana Trial Lawyers Association, NAACP Legal Defense and Education Fund, National Asian Pacific American Legal Consortium, National Employment Law Project, National Employment Lawyers Association, National Partnership for Women & Families, National Treasury Employees Union, National Whistleblower Center, National Women's Law Center, NY County Lawyers' Association Labor and Employment Committee, No Fear Coalition, Northwest Women's Law Center, Ohio State Bar Association, Philadelphia Bar Association, Public Citizen's Critical Mass Energy Project, Public Employees for Environmental Responsibility, Seventh-Day Adventist Church World Headquarters, Society for Human Resource Management, Stamford (CT) Chamber of Commerce, State Bar of California--Labor and Employment Section, State Bar of Wisconsin--Individual Rights and Responsibilities Section, U.S. Chamber of Commerce, Washington State Bar Association, Washington State Trial Lawyers Association, Women Employed.