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.
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.
Tax Act Press
BREAKING NEWS: Congress Passes Attorney’s Fees Provision Of CRTRA!
Click here for NELA’s press release on the CRTRA.
On October 11, 2004, the Senate passed the American Jobs Creation Act of 2004, which includes a provision barring the double taxation of attorneys’ fees in employment discrimination, civil rights, and other cases regulating any aspect of the employment relationship. The House had passed the same bill on October 7, 2004. All that remains is for the President to sign the bill into law, which should come within a matter of days.
The provision permits an above-the-line deduction of attorneys’ fees so that any payments are not subject to the Alternative Minimum Tax or the 2% floor on miscellaneous deductions. The bill is prospective only, applying to fees and costs paid after the date of enactment with respect to any judgment or settlement occurring after such date.
Hopefully, we will see additional relief for those with settlements and awards already paid through the two cases pending before the U.S. Supreme Court, Commissioner v. Banks and Commissioner v. Banaitis. NELA has filed an excellent amicus brief, drafted by NELA member Doug Huron, which is posted on NELA’s Amicus page.
No FEAR Coalition (NFC)
Washington, D.C. 20004
For Immediate Release – 3/07/03
For information: (301) 320-3021
Senator Collins /Congresspersons Pryce and Lewis fight to preserve the 1964 Civil Rights Act: the Civil Rights Tax Relief Act
In 1996, Congress “de-facto” repealed the 1964 Civil Rights Act by imposing punitive and devastating taxes on civil rights victories. Victims of discrimination, after spending years to win civil rights cases, were subject to blinding taxes. Many victims owe the IRS tens of thousands of dollars in taxes after wining Title 7 “victories”. Prior to 1996, Congress did not tax civil rights victories. Senator Susan Collins (R-Ma), Chairman, House Republican Conference Deborah Pryce (R- Oh), and civil rights legend John Lewis (D-Ga) introduced the Civil Rights Tax Relief Act. This legislation will eliminate abusive taxes on civil rights victories.
“The 1964 Civil Rights Act was de-facto overturned by Congress in 1996 – by imposing punitive and inhumane taxes upon people that have suffered horrendous forms of discrimination and were brave enough to fight back” said Dr. Marsha Coleman-Adebayo, Chair, No FEAR Coalition. We thank Senator Collins and Congresspersons Pryce and Lewis for standing up and protecting victims of discrimination”.
Dr. Ruby Reece Moone, President, Southern Christian Leadership Conference/MSC, stated” Dr. Martin Luther King, Jr. would be outraged to know that Congress had imposed severe and mean-spirited taxes upon people that had suffered civil rights abusesâ€¦the civil rights community must rally behind Senator Collins and Congresspersons Pryce and Lewis to ensure passage of this legislation.”
J. Blair Hayes (No FEAR Coalition- Tax Project) , “the current tax code discriminates against victims of discrimination and is meant to discourage people from filing civil rights complaints”. ” Passage of the Tax Relief Act will ensure fairness in our legal system and a just
and equitable society” said James Standish, Esq. Seventh Day Adventist Church.
Rep. F. James Sensenbrenner,Chair, Judiciary Com. (R- WI) and Congresswoman Sheila Jackson- Lee (D-Tx) have indicated their support for this legislation.
The No FEAR Coalition spearheaded the passage of the first civil rights bill of the 21st century: the Notification of Federal Employees Anti-discrimination and Retaliation Act of 2002 (No FEAR). President Bush signed the No FEAR Act into law, May 15, 2002.
No FEAR Coaltion Members: African American Environmentalist Association, EPA Victims Against Racial Discrimination, The National Whistleblower Center, SCLC, CARACLE, Customs Employees Against Discrimination, GAP, NAN, NELA, AARP, US Chamber of Commerce,EPA-NTEU#280, EPA Chapter AFGE, Society for Human Resource Management, Religious Action Committee on Reform Judaism, National Council of Churches in Christ, USA, Seventh Day Adventist Church.
DISCRIMINATION AWARDS ONLY BENEFIT THE IRS
By Arthuretta Martin and J. Blair Hayes
WASHINGTON, DC – One of the most devastating things any individual can experience is discrimination and retaliation in the work environment. Discrimination affects the individuals mental health, physical health, financial health, quality of life and every member of his or her immediate family. Discriminatory and retaliatory acts are declared reprehensible by so many employers, yet many of these employers do not practice what they preach. Equal Employment Opportunity Commission (EEOC) statistics have documented a significant increase in claims alleging employment discrimination and retaliation both in the Federal and private sector. The cause for this increase is debatable; however, what is not debatable is the fact that being successful in proving discrimination is rare–very rare.
Those few individuals who are successful in proving that their employer uses discriminatory practices have presented powerfully compelling evidence that cannot be denied. Justice in those rare instances should be swift and certain. In 1964, Congress defined justice in these cases as “make whole,” compensating the individual as if the discrimination had not occurred. In 1996 however, Congress practically repealed the “make whole” provisions of the Civil Rights Act of 1964 by passing a little known rider to what was called the Small Business Protection Act. That rider changed the way compensatory damages relating specifically to claims of discrimination and retaliation would be taxed. For the first time since the passage of the 1964 Civil Rights Act, emotional distress damages would be taxed, as well as back pay and front pay in the year that the damages were suffered. To add insult to injury, as a result of several Supreme Court decisions, attorneys fees are also taxed, and payments awarded as a result of the claims cannot be income-averaged.
The result has been that, in many cases, not only is the individual not made whole, but also he or she may actually owe the IRS thousands of dollars. If you are compensated for the humiliation you experience from a bar room brawl, you dont have to pay the Federal tax. You are only required to pay it when you have prevailed in an employment discrimination case. Why would Congress do such a thing? Why would any President sign it into law?
Justice and restitution have truly suffered terrible blows. And for those of us who are the victims of employment discrimination, our Federal Government is less than honest… there is no justice for all!
For example, consider the case of Monica McFadden. After 20 years of being subjected to humiliating sexual harassment by the Chicago police force, Ms. McFadden won her claim of discrimination. She was awarded $300,000 in damages and almost $1 million for lawyers fees and costs. However, not only did she lose every penny of the award, she owed the IRS $99,000 in taxes!
Lets take the 2001 case of Cynthia Spina. Ms. Spina won a case where she was awarded the maximum $300,000 against the Forest Preserve District of Cook County. Her employer had berated, belittled and isolated her because of her sex. Unfortunately, Ms. Spina was awarded $850,000 in attorney fees and $100,000 in court costs. Ms. Spina will be taxed at the highest tax rate and, like Ms. McFadden, will wind up owing the IRS thousands of dollars. Magistrate Judge Arlander Keys, who had reduced the original jury award of $3 million to the $300,000, said he was “not unsympathetic to plaintiff’s plight. Plaintiff waged a courageous fight for what she believed was just, even though other female officers who felt similarly victimized lacked the fortitude to do so.” But as we have heard so many times before… the law is the law.
The Federal Government has also been found to be a discriminatory employer at times. Dr. Marsha Coleman Adebayo, Chair of the No-Fear Coalition, knows all too well what happens to an individual and his or her family when after being subjected to discrimination. Dr. Adebayo was successful in winning a $600,000 judgment against the Environmental Protection Agency (EPA). The managers and executives of the EPA had subjected Dr. Adebayo to years of discrimination and retaliation because Dr. Adebayo, the only African-American woman in a predominately white male organization, challenged the Agency’s environmental justice practices in Africa. Dr. Adebayo effectively obtained congressional support to get the No-Fear Act passed. This Act requires Federal agencies to pay restitution to employees out of their own budgets as opposed to a “slush fund” housed in the Department of Justice. The Act also has several provisions that require agencies to inform employees of their rights.
Federal agencies have historically refused to comply with regulatory requirements to inform their employees about their employment rights. Dr. Adebayo has also fallen victim to the IRS hammer. She stated, “I dont know who was asleep at the wheel, but all the hard-won battles that Blacks fought for in the 1950s and 60s to get the Civil Rights Act passed have been all but eradicated by this tax. How could they let this happen?”
Surprisingly, the small businesses that the law was intended to “protect” are also lobbying to get the tax law changed. Companies and businesses have found that it costs more to settle claims of discrimination, because as plaintiffs and plaintiffs lawyers learn more about the tax consequences, the amount of judgments and settlements increase. According to the National Employment Lawyers Association, an individual who settles a civil rights case for $50,000 under current law, with a court awarded $75,000 attorney fee, now receives as little as 13.2 percent of the total award or $16,707.
The Civil Rights Tax Relief Act (HR 840), co-sponsored by House representative John Lewis of Georgia, and S 917, sponsored by Senator Charles Grassley of Iowa, seek to rectify this miscarriage of justice. The Act would:
* Restore real remedies for discrimination cases by eliminating taxes on emotional distress awards.
* Prevent workers subjected to illegal discrimination from paying higher taxes on lump-sum wage awards.
* End the double taxation of attorneys fee awards so individuals bringing civil rights cases will no longer pay taxes on money they do not even receive.
If the Civil Rights Tax Relief Act is passed, the $50,000 scenario described above would result in the plaintiff receiving $44,624; that is $28,000 more! For an individual to receive that much today, it would cost the defendant business $107,000! This is why chambers of commerce across the Nation want the law changed. It just makes good sense and good cents.
Nobody wants to find himself or herself a victim of discrimination in the work place. It can devastate a career. But if it happens and we as Americans protected under the law are successful at either proving the discrimination or settling our claim of discrimination, the last thing we would expect is a tax code that summarily retaliates against us economically for that success.
If you are employed or are an employer, you are affected by the current tax code. There is something you can do. Let your Congressional representatives know that you believe this law is one that should be changed. You can help by first learning more about the Civil Rights Tax Relief Act. Visit http://www.nela.org/news/civilrgithstaxrelief.htm, http://www.gap.org, or http://www.whistleblowers.org for more information.
You can learn more about discrimination and what constitutes discrimination in the work place by visiting http://www.eeoc.gov. If you are seeking general information about other practices and policies by the Federal Government that have adverse impact on Federal employees, visit http://www.feds4justice.org.
Arthuretta Martin, M.S. is Vice President of Federal Employees Against Discrimination (FED). FED is a not-for-profit organization dedicated to the elimination of discrimination and discriminatory practices within the Federal Government. FED is currently studying the Federal administrative process managed by the EEOC that was established to adjudicate employee allegations of discrimination.
J. Blair Hayes is Director, U.S. Civil Rights Tax Relief Project/No Fear Coalition, monitors the implementation and enforcement of the No Fear Act passed into law in April of 2002 . The No Fear Coalition is an ad hoc group of organizations that worked to pass the No Fear Act and is currently working to pass the Civil Rights Tax Relief Act.
The No Fear Bill requires Federal agencies to pay for judgments and settlements involving discrimination from their own budgets as opposed to a Department of Treasury or Department of Justice Fund. In addition, the Act requires Federal agencies to inform their employees of their rights under Civil Rights and Labor laws. Finally, the Act requires Federal agencies to report to Congress on an annual basis the steps they are taking to hold accountable Federal officials who discriminate.