Discrimination Against Damages for Unlawful Discrimination: The Supreme Court, Congress, and the Income Tax
Harvard Journal on Legislation, Vol. 35, p. 447, 1998
61 Pages Posted: 17 Nov 2006
Abstract
Should damages for victims of unlawful discrimination be taxable income? For over seventy years, damages for lost earnings and for pain and suffering were excluded from taxation in all personal injury cases, including discrimination claims. In 1992 and 1995, however the Supreme Court held in two employment discrimination cases that damages for lost earnings were taxable. In 1996, Congress went further, amending the Internal Revenue Code to tax pain and suffering damages, as well as lost earnings, in all nonphysical injury cases, while retaining the exclusion for such damages resulting from physical injuries. This Article argues that the distinction between physical and nonphysical harm results in invidious treatment of discrimination damages. The authors contend that all personal injury awards should be governed by the "in lieu of" principle. Under this principle, damages for lost earnings should be taxed, because earnings are ordinarily taxable, and damages for pain and suffering should be excluded, because they compensate for rights that are ordinarily enjoyed tax-free.
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