Supreme Court Says Age Discrimination Damages Are Taxable
Wagenbrenner, Anne, Journal of Accountancy
The U.S. Supreme Court recently said liquidated damages stemming from an age discrimination claim filed under the Age Discrimination in Employment Act (ADEA) are not tax-free.
Schleier, an airline pilot, was fired because he reached age 60. He brought an age discrimination claim against his employer under ADEA, which gives victims various remedies including recovery of lost wages and payment of liquidated damages. Schleier's suit was settled and he received both liquidated damages and back pay. He did not report the liquidated damages on his tax return.
Internal Revenue Code section 104(a) excludes from gross income "damages received...on account of personal injuries or sickness." The Internal Revenue Service claimed the liquidated damages were not excludable under the personal injuries provision.
The Tax Court said the liquidated damages were excludable under the Supreme Court's test in the Burke case. In Burke, the Court said that for damages to be excludable under the personal injuries provision, the underlying claim had to be based on "tort or tort-type rights." The Tax Court said the ADEA liquidated damages were excludable because the ADEA provided certain tort-type remedies. …