TO EXCLUDE CERTAIN DAMAGES FROM GROSS INCOME IN EMPLOYMENT AND CIVIL RIGHTS CASES
WHEREAS, in 1996, Congress passed the Small Business Job Protection Act making taxable all damage awards and settlements not based on "physical injuries or physical sickness";
WHEREAS, as a result, in employment and civil rights cases, all recoveries involving non-physical injuries (including emotional distress) are taxable regardless of how the injuries are designated in a settlement agreement;
WHEREAS, claimants in employment and civil rights cases may be required to pay income taxes on the attorney fees which they recover from defendants, and the attorney also pays taxes on those funds as income;
WHEREAS, claimants in employment cases who receive money damages for back or front pay are not permitted to average that income over several years even though the tax burden would have been spread over a number of years had the same income been earned in the normal course of employment;
WHEREAS, these provisions and application of the alternative minimum tax often result in the person whose rights were violated receiving less than one-third of settlements;
WHEREAS, these factors inflate the amounts necessary to settle employment and civil rights claims and impair resolution of these cases without litigation;
WHEREAS, the costs to businesses, claimants and the court system resulting from the passage of these provisions of the Small Business Job Protection Act far outweigh any benefit that might have been anticipated;
WHEREAS, House Bill 1997, known as the "Civil Rights Tax Fairness Act of 1999", proposes to "amend the Internal Revenue Code of 1986 to exclude from gross income amounts received on account of claims based on certain unlawful discrimination and to allow income averaging for back pay and front pay awards received on account of such claims and for other purposes";
WHEREAS, the proposed amendments (1) eliminate taxation of emotional distress awards, (2) provide for income averaging of back pay and front pay awards and (3) eliminate double taxation of attorney fee awards and settlements; and
WHEREAS, these changes to the tax code will benefit employers and businesses as well as claimants in employment and civil rights cases by substantially reducing the cost of settling cases out of court while ensuring that individuals who prevail at trial are properly compensated for their actual losses,
NOW THEREFORE, BE IT RESOLVED , that the Philadelphia Bar Association supports and encourages the enactment of legislation restoring the pre-1996 tax treatment of compensatory damages and amending the Internal Revenue Code of 1986 to exclude from gross income amounts received on account of claims based on certain unlawful discrimination and to allow income averaging for back pay and front pay awards received on account of such claims and for other purposes, either as now proposed by House Bill 1997, known as the "Civil Rights Tax Fairness Act of 1999", or otherwise.
AND BE IT FURTHER RESOLVED , that the Chancellor is hereby authorized to communicate this position of the Association to the appropriate legislative bodies.
PHILADELPHIA BAR ASSOCIATION
BOARD OF GOVERNORS
ADOPTED: October 26, 1999