Summary
The United States Supreme Court held that amounts received in settlement of an Age Discrimination in Employment Act claim, including backpay and liquidated damages, are not excludable from gross income under 26 U.S.C. § 104(a)(2). The Court concluded that ADEA recoveries satisfy neither the statutory requirement that damages be received on account of personal injuries or sickness nor the regulation's tort-or-tort-type-rights requirement. The judgment of the Fifth Circuit was reversed.
Topics
Practice areas
Questions Presented
- Whether backpay and liquidated damages received in settlement of an ADEA claim are damages received on account of personal injuries or sickness and therefore excludable from gross income under 26 U.S.C. § 104(a)(2).
- Whether an ADEA action qualifies as an action based upon tort or tort-type rights under Treasury Regulation § 1.104-1(c).
- Whether satisfaction of the regulation's tort-or-tort-type-rights requirement alone is sufficient for exclusion under § 104(a)(2).
Holdings
- No part of a recovery under the ADEA is excludable from gross income under § 104(a)(2) because backpay and ADEA liquidated damages are not received on account of personal injuries or sickness.
- A taxpayer must satisfy two independent requirements to exclude a recovery under § 104(a)(2): the underlying action must be based upon tort or tort-type rights, and the damages must be received on account of personal injuries or sickness.
- An ADEA recovery is not based upon tort or tort-type rights within the meaning of Treasury Regulation § 1.104-1(c).
Key quotations
“First, the taxpayer must demonstrate that the underlying cause of action giving rise to the recovery is "based upon tort or tort type rights"; and second, the taxpayer must show that the damages were received "on account of personal injuries or sickness."” (515 U.S. at 337)
“Congress intended for liquidated damages to be punitive in nature.” (515 U.S. at 332)
Factual background
United Airlines terminated Erich Schleier pursuant to a policy requiring employees to leave when they reached age 60. Schleier brought an ADEA action, which was tried to a jury that found a willful violation; after the judgment was reversed on appeal, the parties settled for $145,629, allocating half to backpay and half to liquidated damages. Schleier reported the backpay as gross income but excluded the liquidated damages and sought a refund of tax paid on the backpay.
Procedural history
Erich Schleier sued United Airlines under the ADEA after being terminated at age 60. After a jury found a willful violation and the district court entered judgment, the judgment was reversed on appeal and the parties settled. Schleier excluded the liquidated-damages portion of the settlement from gross income and sought a refund for tax paid on the backpay portion. The Tax Court ruled for Schleier, and the Fifth Circuit affirmed before the Supreme Court reversed.