Amicus Curiae Brief — United States v. Burke

—

4

No. 91-42

IN THE

Supreme Court of the United States

OCTOBER TERM, 199]

—<y—___$_$_$_$______

UNITED STATES OF AMERICA, ‘EP

Petitioner,

—V.—

THERESE A. BURKE, et ai.,

Respondents.

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

BRIEF AMICUS CURIAE OF THE AMERICAN CIVIL LIBER-

TIES UNION, NOW LEGAL DEFENSE AND EDUCATION

FUND, AND NAACP LEGAL DEFENSE AND EDUCATIONAL

FUND, IN SUPPORT OF RESPONDENTS

Steven R. Shapiro C. Cabell Chinnis, Jr.

Isabelle Katz Pinzler (Counsel of Record)

Anierican Civil Liberties Union Elahna R. Strom

Foundation Philip L. Gordon

132 West 43 Street Elizabeth B. Dixon

New York, New York 10036 Julie E. Barland

(212) 944-9800 Latham & Watkins

1001 Pennsylvania Avenue, N.W.

Washington, D.C. 20004

(202) 637-2200

Julius L. Chambers

Charles Stephen Ralston

NAACP Legal Defense and

Educational Fund, Inc. Alison C. Wetherfield

99 Hudson Street Martha F. Davis

New York, New York 10013 NOW Legal Defense and

(212) 219-1900 Education Fund

99 Hudson Street

New York, New York 10013

(212) 925-6635

Ae oe ~ et ee ee

IBEST AVAILABLE COP

I.

TABLE OF CONTENTS

For over seventy years Congress and the courts

have excluded from gross income damages

received on account of any personal injury,

including both physical and nonphysical injuries.

The Commissioner adds into section 104(a)(2) a

distinction between physical and nonphysical

injuries that conflicts with the plain terms of the

Statute, has no legislative or judicial support, and

is logically flawed. ......................

A. The Commissioner’s distinction between

physical and nonphysical injuries conflicts

with the plain terms of the statute and

creates a restriction on section 104 (a)(2)

that Congress considered and rejected.

B. The distinction between physical and

nonphysical injuries has been rejected by

five Courts of Appeals and the Tax Court. .

C. The Commissioner's proposed distinction

leads to capricious results. ............

D. There is no logical means to distinguish

between physical and nonphysical injuries.

ee it Ss a ae Te oh er io ao i i lo

II.

Ill.

E. The inexorable consequence of the Com-

missioner’s test is taxation of damages for

oo Perret

In applying section 104(a)(2), the Courts of Ap-

peals and the Tax Court have looked to the

nature of the claim asserted by the victim. They

have made no distinction between economic and

noneconomic damages from personal injuries.

A. The Courts of Appeals and the Tax

Court have concluded that a “nature

of the claim” test implements the

intent of section 104(a)(2).............

B. The Commissioner’s proposed test is

at odds with the statute and _ this

Court’s precepts in Woodward and

Gilmore, and is based onan

inapplicable theory regarding the

tenatsom Of GOUINOTS. 2... we wt weees

The Commissioner’s proposed approach, in which

damages attributable to a nonphysical injury are

excludable only where they restore lost capital, is

conceptually misguided, is contrary to the statute,

and renders section 104(a)(2) superfluous. .... .

A. The Commissioner’s definition of “personal

capital” is conceptually misguided. .......

B. The Commissioner’s proposed test has

no basis in the statute. ..............

C. The Commissioner's argument renders sec-

tion 104(a)(2) superfluous. ............

a

_

. 8

.

. _—-

CONCLUSION

D. The Commissioner's test relies on a theory

that has no discernable scope.

IV. Amounts received by respondents in settlement of

their Tithe VII suit are excludable from income

under section 104(a)(2)

A. A violation of Title VII results in “personal

injuries” within the meaning of section

I ee

B. Title VII back pay awards are damages with-

in the meaning of section 104(a)(2).

SS, oe ae Be ae

_] _ ——— fe 6 68 es & @ &e @ 8 @éeeéeetece es

Page

—

24

24

TABLE OF AUTHORITIES

Page

CASES

Bent v. Commissioner, 835 F.2d 67 (3d Cir. 1987) .. . passim

Bernier v. Bernier, 147 U.S. 242 (1893) ............. 22

Brooms v. Regal Tube Co., 881 F2d 412

ER a et deh nls 26

Byrne v. Commissioner, 883 F.2d 211

ee a I ee eo oe ee Te ~

Church v. Commissioner, 80 T.C. 1104 a 8, 18

Commissioner v. Glenshaw Glass Co..

348 US. 426 (1955) .................. 4, 21, 22, 23

Commissioner v. Miller, 914 F.2d 586 (4th Cir. 1990) ..... Ss

Crane \. Commissioner, 331 U.S. 1 (1947) ......... is if

Curtis v. Loether, 415 U.S. 189 (1974) .............. 25

Downey v. Commissioner, 97 T.C. 150 (1991) .. 0.0... IS

Doyle v. Mitchell Bros. Co., 247 U.S. 179 (1918) ....... 22

Escondido Mutual Water Co. v. LaJolla Band

of Mission Indians, 466 U.S. 765 (1984)... 2.2.2... .. 28

Glynn v. Commissioner, 76 T.-C. 116 (1981) .......... 24

Goodman v. Lukens Steel Co., 482 U.S. 656 (1987) ... 25, 26

Hawkins v. Commissioner, 6 B.T.A. 1023 (1927) .. 10, 20, 23

James v. United States, 760 F.2d 590 (Sth Cir. 1985) .... 16

McDonald v. Commissioner, 9 B.TA. 1340 (1928) .... 16, 23

Metzger v. Commissioner, 88 TC. 834 (1987),

aff'd without opinion, 845 F.2d 1013

oe Ae i vi ee 15, 26

National-Standard Co. v. Commissioner.

749 F.2d 369 (6th Cir. aa vada 4

Owens v. Okure, 488 U.S. 235 (1989) ........... ve ae

Pistillo v. Commissioner, 912 F2d 145

ee passim

Price Waterhouse v. Hopkins, 490 U.S. 228 (1989) .. 25

Redfield v. Insurance Co. of N. Am.,

940 F.2d 542 (9th Cir. 1991) ................... 13

iv

Page

Rickel v. Commissioner, 900 F.2d 655

I a a lea og a 8, 17, 24, 25

Roemer v. Commissioner, 716 F.2d 693

ee IIE a Ge eed a ne eke Ao 0 passim

Singer v. United States, 323 U.S. 338 (1945) .......... 22

Sparrow v. Commissioner, 1991 U.S. App.

LEXIS 27991 (D.C. Cir. Nov. 26, 1991) ........... 27

Thompson v. Commissioner, 866 F.2d 709

SN I i ou eis ag ec iara cls 'o's ss ee ou ox passim

Threlkeld v. Commissioner, 87 T.C. 1294

(1986), aff'd, 848 F2d 81 (6th Cir. 1988)... 22... passim

Threlkeld v. Commissioner, 848 F.2d 81

Se EE oo oo ce ee ek ke se ees 7 tm

United States v. Garber, 589 F.2d 843

(Sth Cir.), rev'd, 607 F2d 92 (Sth Cir. 1979) ........ 10

United States v. Gilmore, 372 U.S. 39 (1963) ...... passim

United States v. James, 478 U.S. 597 (1986) ... 2.0... 16

United States v. Kaiser, 363 U.S. 299 (1960) .......... 20

Woodward v. Commissioner, 397 U.S. 572 (1970) .. 14, 15, 16

Wulf v. City of Wichita, 883 F.2d 842

CR WE haa & ow 6 6.0 Oko 's 6 4 oct 7, 13, 17, 25

Zabkowicz v. West Bend Co., 789 F2d 540

Ce SE Sale Ss wee eet a tere co cn oe 26

STATUTES AND REGULATIONS

Vien © Oe COND ow iwicescteacisndds Baw

ke AS dl nee A

Civil Rights Act of 1964, Tit. VII,

42 U.S.C. § 2000e ef seq. (1988) .............. passim

See Ce sD MPM os oc oa eo0s cc levee we desen 4

Ree GD OOD oo ac cececcecssec. tA bh.

Ran GOP Weed © OEE) go. ccc ccccicsccs 27

LEC. (26 US.C.) § 100fau2) ..... 2... ww eee. passim

Eas Ga GPa OUMED 0 gs ccc eect caecees 27

Ren Ce SD OOD onc a dc ecb ween wan ss 27

-¥y

H.R. Rep. No. 767, 65th Cong.,

H.R. Rep. No. 40, 102d Cong., |

edd cs)

Rev. Rul. 61-1, 1961-1 CB. 14.

Rev. Rul. 72-341, 1972-2 CB. 32

Rev. Rul. 85-98, 1985-2 C.B. SI

Rev. Rul. 85-143, 1985-2 C.B. 55

°F? eo Fees 02 ee be

’ 6 2 2 © @° 2 } a

eS et 10, 20, 22, 23

até Raxareeeeee Oe

St Sess..

*" ee 2282807086886 68 ¢

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= BY ge SF

"2 2. 2°6.8 € 6 ew 6 6 6 7 © = 2 @. 6d 6 2 & a

2d Sess. (1918)

10),

INTEREST OF AMICI CURIAE:

The American Civil Liberties Union (“ACLU”) is a

nationwide, nonpartisan organization of almost 300,000 mem-

bers, dedicated to protecting fundamental rights, including the

right to equal treatment under the law. The ACLU has estab-

lished the Women’s Rights Project to work towards the climi-

nation of the pervasive problem of gender-based discrimination.

It is also involved in challenges to many other forms of discrimi-

nation including discrimination based on race, national origin,

religion and disability, The ACLU has participated, both

directly and as amicus curiae, in the litigation of many cases

before the Supreme Court and other courts challenging various

discriminatory practices. It submits this brief to support the

proposition that victims of discrimination, like victims of other

forms of wrongful conduct, should not be required to pay taxes

on amounts recovered for violations of their legal rights.

The NAACP Legal Defense and Educational Fund, Inc..

is a nonprofit corporation organized under the laws of the State

of New York as a legal aid society. It was formed to assist

African Americans to secure their constitutional and civil rights

through the courts. For many years, is attorneys have

represented parties and appeared as amicus curiae in this Court

and in the lower federal courts on a broad range of issues.

including both the substantive and procedural! law relevant to

cases of racial discrimination. It submits this bricf because. |!

the government's position is sustained in the present a the

effectiveness of the remedies for discrimination will be signifi

cantly diminished and the burdens imposed on employers and

employees by treating awards as taxable income will make

settlement more difficult.

The NOW Legal Defense and Education Fund (“NOW

LDEF”) was established as a nonprofit women’s rights law

center in 1970 by founders of the National Organization for

Women, and since that time has consistently worked on

1. Letters of consent to the filing of this brief have been lodged with

the Clerk of the Court pursuant to Supreme Court Rule 37.3

important legal cases and in advocacy and public education

concerning the rights of women. NOW LDEF has particular

concern for discrimination against women in the workplace, and

supports efforts to address the injuries arising from such

discrimination. Consistent with these efforts, it submits this

brief.

SUMMARY OF ARGUMENT

Since 1918, under what is now ILR.C. § 104(a)(2)2

Congress has excluded from gross income “any damages” that

are received on account of a “personal injury.” This exclusion

has applied without regard to whether the injury is physical or

nonphysical, and the courts and the Commissioner have

uniformly so held.

Consistent wiih the terms of the statute and this Court's

holding in United States v. Gilmore, 372 US. 39, 44 (1963), the

Courts of Appeals and the Tax Court have unanimously looked

to the “nature of the claim” to determine the applicability of

§ 104(a)(2). The nature of the damages is irrelevant. Once a

victim has suffered a personal injury, § 104(a)(2) excludes from

gross income all damages for both economic consequences (e.¢.,

lost wages) and noneconomic consequences (e.g., pain and

suffering). In accord with this test, four Courts of Appeals have

held that recoveries for discrimination under Title VII of the

Civil Rights Act of 1964, 42 U.S.C. § 2000¢e et seq. (1988), and

other anti-discrimination statutes constitute damages received on

account of a personal injury. The “nature of the claim” test is

consistent with this Court's precedent and is analytically sound.

It should be upheld.

The Commissioner would have this Court establish a dif-

ferent standard. First, the Commissioner urges that § 104(a)(2)

should be read to divide personal injuries into “physical” and

“nonphysical” injuries. Second, the Commissioner has proposed

that § 104(a)(2) should exclude from gross income recoveries

2. Internal Revenue Code (26 U.S.C.) § 104(4)(2) (hereinafter LR.C.

or the Code).

to

for nonphysical injurics only to the extent they constitute a

“return of capital.” |

This Court should reyect the Commissioner's interpretation

of § 104(a)(2). The separation of physical and nonphysical

injuries conflicts with the clear terms of the statute, which make

no distinction between physical and nonphysical injuries.

Moreover, this proposed distinction has been expressly rejected

by Congress, leads to capricious results, has been rejected by

five Courts of Appeals and the Tax Court, and would inevitably

lead to the taxation of damages for physical injuries as well.

The Commissioner’s second proposal should also be

rejected because ii, too, is at odds with the clear language of

the statute itself and suffers from several additional flaws. First,

the Commissioner’s proposed test fails to recognize that

attributes such as integrity, self-respect, and dignity are as much

a part of “human capital” as are arms and legs. Second, the

test is without basis in the Tax Code and is technically and

logically flawed. Third, the Commissioner's test would render

§ 104(a)(2) superfluous for nonphysical injuries: If § 104(a)(2)

applied only to a “return of capital,” the provision would serve

no purpose because a “return of capital” does not constitute

income. Finally, this additional test relics upon a confusing

theory of return of human capital that is of uncertain scope and

application. :

For all of the above reasons, the arguments offered by the

Commissioner should be rejected. The judgment of the Court

of Appeals should be affirmed.

we

ARGUMENT

L. for over seventy years Congress and the courts have

excluded from gross income damages received on account

of any personal injury, including both physical and

nonphysical injuries. The Commissioner adds into section

104(a)(2) a distinction between physical and nonphysical

injuries that conflicts with the plain terms of the statute,

has no legislative or judicial support, and is logically

flawed.

Section 61(a) of the Code, which is the Statutory starting

point for a determination of gross income, provides that, except

as Otherwise stated in the Code, gross income includes “all

income from whatever source derived.” All accessions to wealth

realized by a taxpayer are therefore presumed to be gross

income and taxable, unless the taxpayer can demonstrate that an

accession fits into one of the specific exclusions created

elsewhere in the Code. Commissioner v. Glenshaw Glass C 0.,

348 U.S. 426, 430 (1955) (Congress intended to tax all gains

except those specifically exempted).’ One such exclusion is

codified at I.R.C. § 104(a)(2), which states:

[G]ross income does not include... (2) the

amount of any damages received (whether by suit

Or agreement and whether as lump sums or as

periodic payments) on account of personal injuries

or sickness... .

In interpretation of the statute, Treas. Reg. § 1.104-1(c) further

provides: “The term ‘damages received (whether by suit or

agreement)’ means an amount received (other than workmen’s

compensation) through prosecution of a legal suit or action

based upon tort or tort-type rights, or through a settlement

3. The parties have apparently agreed that the award represents an

“accession to wealth.” See Brief for the United States at 9 (hereinafter SG

Brief). This determination, however. is a question of law subject to de novo

review by this Court. See Commissioner v. Glenshaw Glass Co.. 348 US. 426,

429 (1955); see also National-Standard Co. vy. ¢ ommussioner, 749 F.2d 369, 37]

(6th Cir. 1984).

~~

agreement entered into in lieu of such prosecution.” An exami-

nation of the statute itself, the circumstances surrounding its

enactment, and subsequent judicial interpretations demonstrates

that Congress intended to exclude from income all damages,

including back pay, received on account of any personal injury,

including nonphysical injuries such as discrimination.

In 1918, Congress enacted the legislative predecessor of

what is now § 104(a)(2). Although Congress apparently shared

the then-widespread belief that damages received on account

of personal injuries were not even within the Sixteenth Amend-

ment’s definition of income,‘ Congress wished to ensure that

victims of personal injury would receive any recoveries for the

injury free of taxation. Accordingly, § 213(b)(6) of the

Revenue Act of 1918 excluded from gross income the follow-

ing:

Amounts received, through accident or health

insurance or under workmen’s compensation acts, as

compensation for personal injuries or sickness, plus

the amount of any damages received whether by

Suit Or agreement on account of such injuries or

sickness.

Revenue Act of 1918, Pub. L. No. 65-254, ch. 18, § 213(b)(6),

40 Stat. 1057, 1065-66. The provision has continued to the

present with only minor modifications.. It currently excludes

4. The legislative history of the Revenue Act of 1918 reflects this

belief:

Under the present law it is doubtful whether amounts received

through accident or health insurance, or under workmen’s

compensation acts, aS compensation for personal injury or

sickness, and damages received on account of such injuries or

sickness, are required to be included in gross income.

H.R. Rep. No. 767, 65th Cong., 2d Sess. 9-10 (1918).

5. In its rearrangement of existing law in 1954, Congress chose to

Separate the provisions relating to the exclusion for workmen's compensation

payments, accident and health insurance proceeds, and damages for personal

injury recoveries. See I.R.C. § 104(a). The regulations follow this division.

This isolation of “personal injury” from other recoveries, such as accident and

(continued... )

'

in

'

from gross income “the amount of any damages received . . . on

account of personal injuries or sickness.” [LR.C. § 104(a)(2).

Since its inception in 1918, § 104(a)(2) has therefore

excluded from gross income all damages received by a victim of

a personal injury on account of that injury. The provision has

never contained any distinction between physical and

nonphysical injuries.

A. The Commissioner’s distinction between physical

and nonphysical injurics conflicts with the plain

terms of the statute and creates a restriction on

section 104(a)(2) that Congress considered and

rejected.

Despite the clear terms of the statute excluding damages

for “personal injury” without regard to physical or nonphysical

injuries, the Commissioner proposes a test that would accord

different treatment to damages depending upon whether those

damages were received on account of a physical personal injury

or a nonphysical personal injury. SG Brief at 14, 20-21. It is

well-settled that “the words of statutes -- including revenue acts

-- should be interpreted where possible in their ordinary,

everyday senses.” Crane v. Commissioner, 331 U.S. 1, 6 (1947).

As-three Courts of Appeals have noted in this context: “The

ordinary meaning of a personal injury is not limited to a

physical one.” Roemer v. Commissioner, 716 F.2d 693, 697 (9th

Cir. 1983).°

Moreover, the Commissioner’s distinction between

physical and nonphysical injury was recently considered and

rejected by Congress. In 1989, the House of Representatives

5.(...continued)

health insurance proceeds, provides further support that Congress believed that

personal injuries may be more than purely physical.

6. This passage is quoted with approval in Bent v. Commissioner, 835

F.2d 67, 70 (3d Cir. 1987). See Pistillo v. Commissioner, 912 F.2d 145. 148

(6th Cir. 1990) (“the meaning of ‘personal injuries’ encompasses both physical

and nonphysical injuries”).

-

approved a provision that would have limited the exclusion ol

§ 104(a)(2) to amounts received on account of physical injury.

The proposal was intended to reverse recent court decisions

broadly interpreting § 104(a)(2) “to cover awards for personal

injury that do not relate to a physical injury,” such as “cases

involving employment discrimination and injury to reputation

where there is no physical injury or sickness.” H.R. Rep.

No. 247, 101st Cong., Ist Sess. 1354-55, reprinted in 1989

U.S.C.C.A.N. 2824-25. At the time of the proposal, four Courts

of Appeals and the Tax Court had interpreted § 104(a)(2) to

exclude from gross income all damages received on account of

a nonphysical personal injury, such as employment discrimina-

tion or defamation.’

The Conferees rejected the House proposal and refused

to limit the exclusion in § 104(a)(2) to recoveries for physical

injuries. Instead, Congress passed a much narrower provision

that limited the scope of the exclusion for punitive damages.

Under this provision, punitive damages from a_nonphysical

injury are now outside the scope of § 104(a).° Section 104(a)

remained unaltered in all other respects.

B. The distinction between physical and nonphysical

injuries has been rejected by five Courts of Appeals

and the Tax Court.

The Commissioner's interpretation conflicts with the

unanimous holdings of five Circuit Courts and the Tax Court.

The Third, Fourth, Sixth, Ninth, and Tenth Circuit Courts of

Appeals have determined that § 104(a)(2) covers damages from

both physical and nonphysical injuries in equal measure.

7. See Wulf v. City of Wichita, 883 F.2d 842 (10th Cir. 1989);

Thompson v. Commissioner, 866 F.2d 709 (4th Cir. 1989), Threlkeld v.

Commissioner, 848 F.2d 81 (6th Cir. 1988), aff'g 87 T.C. 1295 (1986); Bent

835 F.2d 637: Roemer v. Commissioner, 716 F.2d 693 (9th Cir. 1983).

8. See Omnibus Budget Reconciliation Act of 1989, Pub. L. No. 101-

239. § 7641(a), 103 Stat. 2106, 2379 (1989) (codified at 26 U.S.C. § 104 (Supp.

I 1989)).

Commissioner v. Miller, 914 F2d 586, 589 (4th Cir. 1990)

(defamation action is action for personal injuries); Pistillo \.

Commissioner, 912 F.2d 145, 148 (6th Cir. 1990) (“the meaning

ot ‘personal injuries’ encompasses both physical and nonphysical

injuries”); Rickel v. Commissioner, 900 F.2d 655, 658 (3d Cir.

1990) (“personal injuries” under § 104(a)(2) encompass both

physical and nonphysical injuries); Thompson v. Commissioner,

866 F.2d 709, 711 (4th Cir. 1989) (“relevant distinction [is] . . .

not between physical and nonphysical injuries”); Bent

Commissioner, 835 F.2d 67, 70 (3d Cir. 1987) (“ordinary

meaning” of personal injury includes both physical and non-

physical injuries); Roemer, 716 F.2d at 697 (finding “ordinary

meaning” of personal injury to include both physical and non-

physical injuries); Threlkeld v. Commissioner, 87 T.C. 1294, 1297

(1986) (“[nJo distinction is made between physical and non-

physical . . . injuries”), aff'd, 848 F.2d 81 (6th Cir. 1988). Even

the Commissioner has ruled that compensation for lost income

received on account of a nonphysical injury is not taxable

income. See Rev. Rul. 85-143, 1985-2 C.B. 55; Rev. Rul. 85-

98, 1985-2 C.B. 51 (both holding that nonphysical injuries are

within the scope of § 104(a)(2)); Rev. Rul. 56-518, 1956-2 C.B.

25 (“damage to... professional or economic advancement”

from Nazi persecution not taxable).

Not a single court has advanced any distinction between

physical and nonphysical injuries in determining the scope of

§ 104(a)(2) and its predecessors. The courts have specifically

declined to do so when urged by the Commissioner. See, e¢.g.,

Bent, 835 F2d at 70; Church v. Commissioner, 80 T.C. 1104,

1106 (1983). This Court should not impose such a distinction

now.

C. The Commissioner’s proposed distinction leads to

capricious results.

The distinction between physical and nonphysical injuries

results in disparate treatment of similarly situated taxpayers

under § 104(a)(2).. As the Tax Court noted in its en banc

opinion’ in Threlkeld, if a tortteasor causes a surgeon to lose a

finger, the loss will cause both noneconomic consequences (¢.g.,

pain and suffering) and economic consequences (¢.g., lost

income). The entire amount of damages received is excludable.

87 T.C. at 1300. If the surgeon’s injuries were nonphysical (e.g.

defamation), the Commissioner would require that courts

“delve[] into an inquiry regarding the nature of the conse-

quences of the injury,” id. at 1300-01, to determine which

portion of the award represented a recovery for economic con-

sequences and which portion represented a recovery for non-

economic consequences. For nonphysical injuries, the Commis-

sioner would tax the recovery for economic consequences as an

accession to wealth: The lost income would have been taxable

when earned. SG Brief at 21. See Rev. Rul. 72-341, 1972-2

C.B. 32. There is no logical basis for this distinction between

these two tort victims, and this Court should not accept it.

There is no reason to believe that Congress intended such

inconsistencies. “We should be slow to attribute to Congress a

purpose producing such unequal treatment among taxpayers,

resting on no rational foundation.” Gilmore, 372 U.S. at 48.

D. There is no logical means to distinguish between

physical and nonphysical injurics.

The Commissioner's distinction between physical and

nonphysical injuries is semantic and arbitrary. No principle of

taxation provides any guidance for differentiating between

recoveries for physical and nonphysical injuries.

The practical problems of the Commissioner's proposed

test are immediately apparent. A taxpayer whose back is

broken suffers both broken bones and mental pain and

suffering. He may also suffer a loss of wages if he is subse-

quently fired from his job. The Commissioner's test would

require courts to determine whether the firing took place as a

result of the physical injury (impaired mobility) or the

Q ‘Technically. the Tax Court does not sit en banc but rather reviews

certain decisions as a “Full Court.”

x <

nonphysical injury (depression and anxiety). Similarly, a victim

of discrimination on the job may suffer both an affront to her

dignitary interests and headaches, ulcers, as well as other

ailments. It becomes impossible as a practical matter to

differentiate the harm from the effect on the tort victim.

There is no principle of taxation that would enable courts

to make the distinctions in the Commissioner's proposed test.

Both an arm and intellect, for example, constitute human

capital. See Hawkins v. Commissioner, 6 B.T.A. 1023, 1025

(1927) (reputation as human capital); 31 Op. Att'y Gen. 304

(1918) (human body as “a kind of capital”), quoted in Sol. Op.

1384, 2 C.B. 71, 72 (1920). Both can be damaged or dimin-

ished. Both can generate income. Neither has basis. See

United States v. Garber, 589 F2d 843, 849-50 (Sth Cir.)

(Clark, J., dissenting), rev'd, 607 F2d 92 (Sth Cir. 1979).

The only apparent distinction between a physical injury

and a nonphysical injury is the nature of the causal relation

between harm and effect. The causal relation between physical

intrusion and the resultant injury is often more readily

perceived simply because there is tangible evidence showing the

connection. This evidentiary difference, however, does not

provide any principled means of separating the two types of

injury and certainly has no relevance in taxation. From a tax

perspective, this proposed distinction is plainly and simply

arbitrary. This Court should reject the Commissioner's attempt

to require the courts to make such unprincipled distinctions.

E. The inexorable consequence of the Commissioncer’s

test is taxation of damages for physical injuries.

The Commissioner’s theory regarding nonphysical injuries

would logically lead to taxation of damages for physical injuries,

reversing Over seventy-five years of unbroken precedent and tax

policy. |The Commissioner’s theory regarding taxation of

damages for nonphysical injuries is simple. First, a back pay

award for work performed represents an accession to wealth

because it is a substitute for wages for services already provided,

which would have been taxed as income if received currently

- 10 -

during employment." SG Brief at 7. (The Commissioner

extends this reasoning to wages received for wrongful termina-

tion. Id. at 26 n.20.) Second, because such a recovery rep-

resents an accession to wealth, the exclusion of § 104(a)(2)

would not be available under the Commissioner's test because

the taxpayer could not establish that the recovery was a “reim-

bursement for a prior loss of personal ‘capital. | Id. at 14-15.

This logic cannot be limited to nonphysical snjanies. it

applies with equal force to a pianist or surgeon whose w gp

are injured, or a construction worker whose back is injure : or

a schoolteacher whose voice is impaired. The lost wages in

Rev. Rul. 61-1, 1961-1 C.B. 14, for example, would be taxable

because they would have been taxable when carned. |

Indeed, the logic of the Commissioner's position Is not

limited to back pay. Future earnings, like past carnings,

subject to tax when earned. Therefore, a recovery for loss of

future earnings cannot be a tax-free return of capital. In am,

the logic of the Commissioner's circular reasoning has ao ay al

ping point except the full taxation of all damages measured by

past or future loss of earnings. This reasoning would Gvertern

almost seventy-five years of tax law excluding these recoverics

from taxation. . |

The dramatic changes which would result from accepting

the argument urged by the Commissioner have been ome

ed and rejected by Congress. They should also be rejected by

this Court.

10. ‘This concept is discussed critically in Knickerbocker, The Income

Tax Treatment of Damages: A Study in the Difficulnes of the Income Concept,

47 Cornell L.Q. 429, 435 (1962). Amici beheve that respondents recovery

does not represent back wages for the reasons stated infra p. 15 & 1.16.

se.

Il. In applying section 104(a)(2), the Courts of Appeals and

the ‘Tax Court have looked to the nature of the claim

asserted by the victim. They have made no distinction

between cconomic and noneconomic damages from per-

sonal injurics.

A personal injury will often involve both economic conse-

quences, such as lost wages, and noneconomic consequences,

such as pain and suffering."' A surgeon whose hand is disabled

or a baseball player whose back is injured will suffer both bodily

pain and mental distress (noneconomic consequences) and lost

wages (economic consequences). Valuation of a lost hand or a

bad back can be so difficult that ultimately a victim may resort

to the use of an economic yardstick to demonstrate the extent

of the harm he has suffered, even though the noneconomic

consequences may constitute the bulk of the harm."

Congress apparently has recognized that a personal injury

frequently entails both economic and noneconomic conse-

quences and has written § 104(a)(2) to exclude both. Under

the terms of § 104(a)(2), “any damages” are excluded so long

as they are received on account of a personal injury (emphasis

added).

11. The Courts of Appeals also use the term “nonpersonal con-

sequences” to describe economic consequences and “personal consequences”

to describe noneconomic consequences. See, e.g, Bent, 835 F.2d at 70; Roemer,

716 F.2d at 699. This brief uses the economic/noneconomic distinction merely

to avoid confusion between a “personal injury” and its consequences, which can

be both “personal” and “nonpersonal.”

12. As the revenue solicitor noted over sixty years ago:

The [personal] rights on the one hand and the moncy on the other arc

incomparable things which can not be placed on opposite sides of an

equation. [Such a] personal right . . . is not assignable and not suscep-

tible of any appraisal in relation to market values... .

Sol. Op. 132, I-1 C.B. 92, 93 (1922).

- 2.

-

A. The Courts of Appeals and the Tax Court have

concluded that a “nature of the claim” test imple-

ments the intent of section 104(a)(2).

In following the clear wording of the statute, the Circuit

Courts and the Tax Court have unanimously concluded that

§ 104(a)(2) requires only that a court determine whether

damages have been received on account of a personal injury.

The fact that some of the damages may represent recoveries

for economic consequences is of no import in assessing the

taxability of damages. So long as the “nature of the claim” is

that of a claim for personal injury, the resultant damages are

excluded under § 104(a)(2).

An often-cited articulation of this “nature of the claim”

test is in Threlkeld:

Section 104(a)(2) excludes from income amounts

received as damages on account of personal injuries.

Therefore, whether the damages received are paid on

account of “personal injuries” should be the beginning

and end of the inquiry. Yo determine whether the

injury complained of is personal, we must look to

the origin and character of the claim... , and not

to the consequences that result from the injury.

87 TC. at 1299 (citations omitted) (emphasis added).’’ The

Third, Sixth. Ninth, and Tenth Circuits have adopted this test,

and the Fourth Circuit has adopted it in part."

13. In Threlkeld, the Tax Court held that § 104(a)(2) excluded from

gross income a malicious prosecution settiement attributable to injury to the

taxpayer’s professional reputation because the amount constituted damages

received on account of personal injuries. See 87 T.C. at 1308.

14. Prstillo, 912 F.2d at 148 (3d Cir.); Threlkeld, 848 F.2d at 84 (6th

Cir.); Redfield v. Insurance Co. of N. Am., 940 F.2d 542, 544-45 (9th Cir.

1991); Wulf, 883 F.2d at 872-73 (10th Cir.). The Fourth Circuit, in Thompson,

866 F.2d at 712, seems to have adopted a bifurcated test. The 7hompson

court began with the proposition that the tax treatment of an award of

liquidated damages and back pay received in a suit under Title VII and the

Igual Pay Act turns on whether “the awards were received for personal

(continued... )

se

The courts’ uniform adoption of a “nature of the claim”

analysis is appropriate for four reasons. First, and most impor-

tant, the test is consistent with the statute’s clear reference to

“any damages,” and makes no distinction among the damages

that may be received on account of personal injury."

Second, the use of a “nature of the claim” test to deter-

mine the nature of damages received on account of litigation

comperts with this Court's holdings in the analogous area of

the characterization of the consequences of litigation. In

Gilmore, 372 U.S. 39, this Court held that the expense of

defending a divorce suit was a nondeductible personal expense

(rather than a deductible business expense) because its origin

was personal rather than from the taxpayer’s business. The

Court expressly rejected a test based upon the consequences of

the litigation: ,

The principle we derive ... is that the

characterization, as “business” or “personal,” of the

litigation costs of resisting a claim depends on

whether or not the claim arises in connection with

the taxpayer's profit-seeking activities. It does not

depend on the consequences that might result to a

taxpayer's income-producing property from a failure

to defeat the claim... . [S]uch a rule would lead

to capricious results.

Id. at 48 (emphasis in original); see Woodward v. Commissioner,

397 U.S. 572, 577-78 (1970). Like the “consequences test”

-

14.(...continued)

injuries through prosecution of a legal action based upon tort or tort-type

rights.” /d. at 711. That is the Threlkeld test. The court then determined

that a sex discrimination claim 1s a tort-type action. /d. at 712. The entire

award, therefore, should have been excluded under § 104 (a)(2). The court.

however, then focused on the nature of the damages received and determined

that the liquidated damages award was excludable as compensatory damages,

but the back pay award was not excludable because it was in the nature of a

breach-of-contract award. /d.

15. As noted supra pp. 6-7, in 1989 Congress did exempt punitive

damages for nonphysical injury from § 104(a)(2). Punitive damages are not

al issue in this Case.

-14-

rejected in Gilmore and Woodward, the Commissioner's reliance

here on the consequences of personal injury litigation would

“encourage resort to formalisms and artificial distinctions.” Jd.

at 577.

Third, the “nature of the claim” approach is analytically

sound because it avoids confusion between the personal injury

itself and its consequences. As the Ninth Circuit noted:

Although there are different types of defamation

actions (libel or slander) depending on the form of

the defamatory statements, all defamatory

statements attack an individual’s good name. This

injury to the person should not be confused with

the derivative consequences of the defamatory

attack, Le., the loss of reputation in the community

and any resulting loss of income... . The personal

nature of an injury should not be defined by its

effect.

Roemer, 716 F.2d at 699 (footnote omitted) (emphasis added).

Finally, the “nature of the claim” test avoids confusion

between what constitutes “damages” under § 104(a)(2) and how

those damages, once found, are measured. Back pay or a simi-

lar economic yardstick is often simply used as a workable and

expeditious means of measuring damages to a person’s digni-

tary rights. Congress and the courts have used such measure-

ments as a matter of convenience to protect rights that cannot

be valued with any precision. As the Ninth Circuit has noted:

“The nonpersonal consequences |i.e., an economic yardstick] of

a personal injury, such as a loss of future income, are often the

most persuasive means of proving the extent of the injury that

was suffered.” Roemer, 716 F.2d at 699 (emphasis added)."”

16. See Threlkeld, 848 F.2d at 84 (loss of future income “often the

most persuasive means of proving the extent of the injury that was suffered”

and “personal nature of an injury should not be defined by its effect”); Bent,

835 F.2d at 70 (“an award of damages for the violation of a constitutional right

may be measured in whole or in part by the amount of lost wages”); Metzger

v. Commissioner, 88 T.C. 834, 858 (1987), aff'd without opinion, 845 F.2d 1013

(3d Cir. 1988) (loss of income may merely be an evidentiary factor or the best

measure Of loss).

+

B. The Commissioner’s proposed test is at odds with

the statute and this Court’s precepts in Woodward

and Gilmore, and is based on an inapplicable theory

regarding the taxation of damages.

The Commissioner disregards the clear terms of the

Statute that exclude “any damages” and instead proposes a test

that distinguishes between economic and noneconomic conse-

quences. According to the Commissioner, for nonphysical

injuries, any receipt of back pay’ (damages for economic

consequences) represents an accession to wealth that should be

taxed upon receipt by the tort victim. There is no basis in law

or logic for such a distinction, and this Court should reject it.

First, there is no basis in the statute for distinguishing

among different consequences from a personal injury. The

Statute states “any damages.” It contains no qualification. Any

further elaboration would make it “ ‘read like an insurance

company’s form [of] general reiease rather than a statute.’ ’

United States v. James, 478 U.S. 597, 604 n.5 (1986) (quoting

James v. United States, 760 F.2d 590, 604 (Sth Cir. 1985) (Gee,

J., dissenting)). Despite the long history of a fully inclusive

definition of damages,"* Congress has restricted § 104(a) only

with respect to punitive damages for nonphysical injuries.

Congress knows how to differentiate among types of damages

for personal injury, yet it has declined to make the distinction

the Commissioner now proposes.

17. Under the Commissioner's theory, “back pay” includes not only

wages for work already performed, but also wages received for a wrongful

discharge, where no work was performed. SG Brief at 18, 26 n.20.

18. The Commissioner has long held that § 104(a)(2) excludes

recoveries attributable to back pay. Rev. Rul. 61-1, 1961-1 C.B. 14. The

courts have also construed damages from personal injury to include a broad

range of harms. McDonald v. Commissioner, 9 B.T.A. 1340, 1341 (1928)

(excluding from gross income damages for breach of contract to marry,

including “loss of station to which the marriage would have advanced plaintiff’ ).

- 16 -

Moreover, although the Commissioner has repeatedly

attempted to have courts accept a distinction between economic

and noneconomic consequences, these attempts have met with

a string of defeats. In Roemer, 716 F.2d at 697, the Ninth

Circuit found no basis for distinguishing between economic

recoveries (e¢.g., lost wages) and noneconomic recoveries (¢.g.,

pain and suffering): Section 104(a)(2) applied even “when the

predominant result of the injury is a loss of income.” Following

the decision in Roemer, the full Tax Court (by a 15-1 vote) and

the Third, Sixth, and fenth Circuits also rejected any distinction

between economic and noneconomic consequences.”

In an attempt to find some support ior his proposed

distinction, the Commissioner argues that the taxability of

recoveries should be determined under the principle that

damages should be taxed in the same manner as the items they

replace. SG Brief at 17. Back pay for lost wages, for example,

would be taxable when received as damages because they would

have been taxable when earned. This “substitution principle”

is based on the theory that a payment received in settlement of

a claim is simply a substitute for what the taxpayer would have

received if there had been no dispute between the parties in

19. Rickel v. Commissioner, 900 F.2d 655, 661 (3d Cir. 1990) (nature

of claim controlled; irrelevant wheiher damages, including back pay, compensate

taxpayer for economic losses); Byrne v. Commissioner, 883 F.2d 211, 214 (3d

Cir. 1989) (“relevant inquiry” in concluding settlement under New Jersey anti-

discrimination law excludable “is whether the settlement was received on

account of personal or non-personal injuries, not whether the damages

compensate the taxpayer for economic losses”); Bent, 835 F.2d at 70 (3d Cir.)

(settlement for First Amendment violation “admittedly” based on lost wages

excludable; loss of future wages “often the most persuasive means” of proving

extent of injury); Pistillo, 912 F.2d at 150 n.6 (6th Cir.) (specifically rejecting

the Commissioner’s proposed distinction in ADEA action between award of

back pay and compensation for loss of human capital: “{W]hether [defendant}

paid [the taxpayer] a portion of the settlement award to compensate him for

pain and suffering or lost back pay 1s irrelevant to the § 104(a)(2) inquiry”):

Wulf, 883 F.2d at 872-73 (10th Cir.) (award for lost wages -- including the

portion of the recovery specifically representing back pay -- was excludable

under § 104(a)(2) for First Amendment violation); Threlkeld, 87 7.C. at 1308

(damages received in settlement of malicious prosecution suit, including those

for injuries to professional reputation, are excludable under § 104(a)(2)).

=. -

the first place. See Church, 80 TC. at 1108; Fouts, Payments

Received in Settlement of Litigation and Claims, 25 N.Y.U. Inst.

Fed. Txn. 555, 556 (1966). This argument is flawed for two

reasons. First, the argument begs the guestion. Lost wages

may merely be a yardstick for other damages. See supra p. 15

& n.l6. An award for an injury to dignitary interests does not

constitute back pay. Second, § 104(a)(2) clearly constitutes an

exception to the “substitution principle.” See Downey \,

Commissioner, 97 T.C. 150, 164 (1991) (8 104(a)(2) “allows the

exclusion for damages that are a substitute for amounts or items

that otherwise would be taxable or would potentially produce

taxable benefit, such as income lost as a result of a personal

injury”). Even the Commissioner concedes that the exclusion

of § 104(a)(2) applies to payments received in ticu of wages by

virtue of physical injury. These wages, however, would also

have been taxable when earned and would therefore be taxable

under the substitution principle.”

Ill. The Commissioner’s proposed approach, in which

damages attributable to a nonphysical injury are exclud-

able only where they restore lost capual, is conceptually

misguided, is contrary to the statute, and renders sec.

tion 104(a)(2) superfluous.

In his attempt to exclude respondents’ awards from the

scope of § 104(a)(2), the Commissioner intreduces the concept

that a recovery received on account of a nonphysical injury is

excludable from income only if it compensates the taxpayer for

20. The Commissioner also protests that “tax-free” recoveries constitute

an improper windfall where they would otherwise have been taxable. SG Brief

at 22 n.16. The Commissioner's argument is not relevant in determining the

scope of § 104(a)(2). First, victims of personal injury are accorded the

exclusion of § 104(a4)(2) because the award, even if proximately measured by

hack pay or lost wages, are to compensate for a personal injury, an interest for

which there is no ready price. See Pistillo, 912 F.2d at 150. Second, there is

nO reason to believe that Congress has not maintained the exclusion out of a

sense of compassion for the victims of personal injury. Roemer, 716 F.2d at

696 n.2.

- 18 .

a prior loss of “personal capital.” SG Brief at 14. Because a

damage award measured by back pay purportedly would not

constitute such a recovery, the amount would be taxable. See

SG Brief at 20-21, 26 n.20. This Court should reject the

Commissioner's proposed approach.

A. The Commissioner’s definition of “personal capital”

is conceptually misguided.

The Commissioner concedes that damages received on

account Of physical injuries, even when measured by back pay,

constitute a return of personal capital and are not taxable. SG

Brief at 21 n.16. The Commissioner then argues that damages

received on account of nonphysical injuries, when measured in

precisely the same fashion, cannot constitute a return of

personal capital. SG Brief at 26 n.20. This position is ill-

conceived and conceptually misguided. A person’s intellect,

integrity, self-respect and good name are as much “personal

capital” as are arms and legs and good health. Ail are essential

aspects of a human being.*!

The issue is not whether income can be generated from

such personal capital. Nor is the issue whether such income,

when generated, can be taxed. The issue is whether damages

received from an injury to such personal capital are or should

be taxed and, more specifically, in this case, whether such

damages should be taxed when the injury was caused by years

of invidious discrimination based upon the sex of the injured

party.

21. See William Shakespeare, Othello, act 3, sc. 3:

Good name in man and woman, dear my lord,

Is the immediate jewel of their souls:

Who steals my purse steals trash; ‘tis something, nothing:

“Iwas mine, ‘tus his, and has been slave to thousands:

But he that filches from me my good name

Robs me of thet which not enriches him,

And makes me poor indeed.

-19.

It is undisputed that the tax law does not and should not

tax the possession or enjoyment of “personal capital” such as

good health or a fine intellect. See Hawkins, 6 B.T.A. at 1025.

The Commissioner’s. own rulings have long recognized this

principle. From 1918 to the present, the IRS has steadfastly

maintained that damages received on account of a personal

injury should not be taxed because they are a return of

personal capital. See Sol. Op. 1384, 2 C.B. at 72 (citing 31 Op.

Att'y Gen. 304 (1918)); Rev. Rul. 61-1, 1961-1 C.B. 14; Rev.

Rul. 85-143, 1985-2 C.B. 55 (citing rulings).

While these rulings have been couched in technical tax

terms such as “basis” and “return of capital,” as Justice

Frankfurter acknowledged in Uniied States v. Kaiser, 363 U.S.

299, 311-12 (1960) (Frankfurter, J., concurring), these rules are

technically suspect but unquestionably correct:

The principle at work here [in the Commissioner's

holdings in Sol. Op. 1384 and Sol. Op. 132, I-1 C.B.

92 (1922)] is that payment which compensates for a

loss of something which would not itself have been

an item of gross income is not a taxable payment.

If a capital asset is sold for no more than its

basis there is no taxable gain. The result, then, is

the same if.it is destroyed and there is paid in

compensation no more than its basis. There are, to

be sure, difficulties, not present where ordinary

assets are involved, in applying this principle to

compensation for the loss of something which has

no basis and which is not ordinarily thought of as

a Capital asset, such as health or life or affection or

reputation. .. .

[In recoveries for personal injury,] the thing

lost and compensated for was not an item of taxable

income, but an aspect of capital or analogous to

capital, which obviously would not have been

included in gross income had it been retained.

- 20 -

Id. (emphasis added).*

The Commissioner's rulings cited above are technically

questionable because in reality such “personal capital” has no

measurable basis. Because “personal capital” has no_ basis,

theoretically any amount received as compensation for its loss

is technically “gain.” The rulings, however, are also unquest-

ionably correct in excluding such theoretical gain from taxation.

They are correct for one simple and overriding reason: Any tax

system that reached a different result would be one that placed

the technical theory of gain and loss and income above basic

concepts of value and human dignity.

B. The Commissioner’s proposed test has no basis in

the statute.

The Commissioner’s “return of capital” theory also suffers

from the flaw that it has no basis in the statute. In fact, there

is not one shred of evidence in the statute that Congress

intended to limit the term “any damages” to awards that

constitute a return of capital. Neither the statute itself nor the

legislative history refers to such a concept. Moreover, there are

substantial reasons to believe that Congress did not intend that

the courts read a return of capital qualification into § 104(a)(2).

Such a reading would render § 104(a)(2) a nullity and introduce

a complex and difficult test into tax administration.

22. Under a traditional application of the return of capital theory, all

personal injury recoveries (which are by definition compensatory only, Glenshaw

Glass, 348 U.S. at 432 n.8) do not constitute accessions to wealth. The

Commissioner’s distinction between “return of capital” and “gain or profit”

would therefore have no application for compensatory damages, whether those

damages compensated for economic or noneconomic consequences. It is also

arguable that, regardless of considerations of tax theory, Congress has accepted

the Commissioner’s de facto exclusion of these items from income through con-

tinued congressional acquiescence. See Boris |. Bittker & Martin J. McMahon,

Jr., Federal Income Taxation of Individuals % 3.6, at 3-20 (1988) (arguing for

such congressional acquiescence ).

-=

C. The Commissioner’s argument renders section 104

(a)(2) superfluous.

The Commissioner argues that, for nonphysical injuries,

§ 104(a)(2) should exclude only those recoveries that represent

a “return of capital” to the taxpayer.” Acceptance of the Com-

missioner’s “return of capital” argument reads § 104(a)(2) out

of the Code. This Court should reject it.

The Commissioner’s position could not be more clear.

According to his argument, respondents must establish that “the

recovery is reimbursement for a prior loss of personal

‘capital’. . . and does not represent gain or profit that ‘instead

add|s] to [their] wealth. ” SG Brief 14-15 (citations omitted).

It is equally clear, however, if a taxpayer can establish that a

reimbursement is a return of capital, the amount does not

constitute income in any event and would not be taxable under

the Sixteenth Amendment. 31 Op. Att'y Gen. 304; Sol. Op.

132, I-1 C.B. at 93; see Doyle v. Mitchell Bros. Co., 247 US.

179, 185 (1918) (return of capital not income).

If the amounts received constitute a “return of capital,”

then under this Court’s holding in Doyle, the amounts do not

constitute income and by definition they are not taxable under

the Sixteenth Amendment. The Commissioner, however, would

limit the exclusion of § 104(a)(2) to precisely those recoveries.

At least with respect to nonphysical injuries, the Commissioner's

test would read § 104(a)(2) out of the Code. This Court has

long held that an interpretation of a statute that renders the

Statute a nullity cannot be adopted. Singer v. United States, 323

U.S. 338, 344 (1945) (Court avoids interpretation that makes

provision redundant); Bernier v. Bernier, 147 U.S. 242, 245

(1893) (statutes must be interpreted so that one section “will

not defeat or destroy another, but explain and support it”).

23. Relying on footnote & of Glenshaw Glass, the Commissioner argues

that the Court “did not reject” his position, taken since 1918, that recoveries

for personal injuries do not constitute income to the extent they “correspond

to a return of capital.” SG Brief at 13.

Because acceptance of the Commissioner's argument would

have this precise effect, that construction should be rejected.

D. The Commissioner’s test relics on a theory that has

no discernable scope.

The Commissioner's test also suffers from the arbitrary

distinction between what constitutes a “return of capital” versus

“gain or profit.” The Commissioner argues that recoveries of

back wages on account of a physical injury are a return of capi-

tal. SG Brief at 21 n.16. But the Commissioner insists that

recoveries for back wages on account of a nonphysical injury

are not a return of capital. SG Bricf at 26 n.20. These two

situations, however, are indistinguishable. In both cases the

victims are prevented from earning their wages either because

(for example) the employer’s machinery tortiously injured the

employee or because (for example) the employer

discriminatorily fired the employee. There is no discernable

reason to conclude that human capital includes the ability to

obtain an income stream in the former instance and not in the

latter. The Commissioner attempts to distinguish the two tort

victims by arguing that back wages for nonphysical injuries

represent wages that should have been paid but were not. This

distinction, however, provides no guidance regarding the

contours of “human capital” since both tort victims cannot work

and do not receive wages.

Nor do cases or rulings illuminate the inquiry. Because

of the novelty of the Commissioner's test, no court has ever

examined this issue in determining the scope of § 104(a)(2). In

fact, the only guidance available predates Glenshaw Glass by at

least twenty years. See McDonald v. Commissioner, 9 B.T.A.

1340, 1341 (1928) (damages for breach of contract to marry);

Hawkins, 6 B.T.A. at 1025 (defamation); Sol. Op. 132, I-1 C.B.

at 93 (defamation, alienation of affections, surrender of a child):

31 Op. Att'y Gen. 304 (personal injury). The Commissioner's

test is unwarranted under the statute and, because of the lack

of definiteness of “human capital,” injects vast uncertainty into

tax administration. This Court should reject it.

-.

IV. Amounts received by respondents in settlement of their

Title VII suit are excludable from income under sec-

tion 104(a)(2).

As discussed supra pp. 13-15, the Tax Court and the

Courts of Appeals have uniformly based the tax treatment of

damages received through suit or settlement on the nature of

the claim giving rise to the awards. Because suits brought

under Title VII allege a personal injury within the meaning of

§ 104(a)(2), any damages received through prosecution or

settlement of a Title VII action fall squarely within the

exclusion. Because the back pay awards received by respond-

ents are “damages received . . . on account of personal injuries”

within the meaning of § 104(a)(2), the entire award is

excludable from gross income.

A A violation of Title VII results in “personal

injuries” within the meaning of section 104(a){2).

Although § 104(a)(2) does not define the term “personal

injuries,” the Tax Court and the Courts of Appeals have con-

sistently interpreted it to have two components. First, to

qualify as an injury, the alleged harm must give rise to “some

sort of tort claim against the payor.” Glynn v. Commissioner,

76 T.C. 116, 119 (1981); see Pistillo, 912 F.2d at 148; Rickel,

900 F.2d at 658. Second, a “personal” injury requires the Court

to distinguish between personal and nonpersonal injuries.

Roemer, 716 F.2d at 697 (“relevant distinction that should be

made is between personal and nonpersonal injuries”);

Thompson, 866 F.2d at 711 (same). An injury to property, for

example, would be a “nonpersonal” injury. Because a claim for

violation of Titke VII meets both requirements, it is a claim on

account of “personal injuries” within the meaning of

§ 104(a)(2).

A claim of employment discrimination implicates a tort or

tort-type right in either of two ways. First, it may allege a

breach of duty that “arises by operation of law,” “independent

. 24-

of any duty an employer might owe his employee pursuant to

an express or implied employment contract.” Byrne v. Commis-

stoner, 883 F.2d 211, 215 (3d Cir. 1989) (violation of FLSA\s

duty not to discriminate against whistleblowers); see Pistillo, 912

F.2d at 149 (violation of ADEA’s duty not to discriminate on

the basis of age); Rickel, 900 F.2d at 662 (same); Thompson,

866 F.2d at 712 (“tort action is one for ‘a direct invasion of

some legal right of the individual’ independent of contract”)

(quoting Black’s Law Dictionary 1335 (Sth ed. 1979)). An

employment discrimination action also vindicates a tort-type

right when it alleges “any invasion of the rights that an

individual is granted by virtue of being a person in the sight of

the law.” Threlkeld, 87 T.C. at 1308; see Bent, 835 F.2d at 69

(42 U.S.C. § 1983 (1988) violation; invasion of right to freedom

of speech); Wulf, 883 F.2d at 873 (same).

An action based on Title VII falls squarely within either

definition. A claim under Title VII seeks to remedy an alleged

violation of the employer’s statutory duty not to discriminate on

the basis of race, color, religion, sex cr national origin, a duty

independent of any contractual duty an employer might owe its

employees. 42 U.S.C. § 2000e-2 (1988); Thompson, 866 F.2d at

712 (“right to be free from unreasonable gender discrimination

is a personal right” independent of contract). Similarly, it has

long been held that discrimination on the basis of sex, race, or

national origin results in an invasion of the individual rights and

dignity of the person. See, e.g., Goodman v. Lukens Steel Co.,

482 U.S. 656, 661 (1987) (race discrimination, challenged under

42 US.C. § 1981 (1988), “is a fundamental injury to the

individual rights of a person”); Curtis v. Loether, 415 U.S. 189,

195 n.10 (1974) (analogizing race discrimination to a “dignitary

tort”); Price Waterhouse v. Hopkins, 490 U.S. 228, 264 (1989)

(O'Connor, J., concurring) (violauon of Title VII, “the statutory

employment ‘tort,’ ” similar to common law tort). Respondents’

Title VII claim alleging unlawful gender discrimination,

therefore, seeks vindication of tort-type rights.

A violation of Title VII also results in an injury to the

person of the claimant. Courts have frequently noted the physi-

cal and psychological injuries resulting from workplace dis-

crimination on the basis of sex, race or national origin. See,

e.g., Zabkowicz v. West Bend Co., 789 F.2d 540, 542 (7th Cir.

1986) (doctor’s diagnosis of “ ‘gastro-intestinal disease due to

{sexual} harassment at work’ ”); Brooms v. Regal Tube Co., 881

F2d 412, 417 (7th Cir. 1989) (severe, debilitating depression

caused by sexual and racially motivated harassment in work-

place). Congress, too, has recognized that personal injuries

result from workplace discrimination:

Victims of intentional discrimination often endure

terrible humiliation, pain and suffering while on the

job. This distress often manitests itself in emotional

disorders and medical problems, which in turn cause

victims of discrimination to suffer substantial out-

of-pocket ‘medical expenses and other economic

losses as a result of the discrimination. ... The

Committee intends to confirm that the principle of

anti-discrimination is as important as the principle

that prohibits assaults, batteries and other inten-

tional injuries to people.

H.R. Rep. No. 40, 102d Cong., Ist Sess., pt. 1 at 14-15 (1991)

(emphasis in original). These injuries to the person of the

victim are clearly distinct from nonpersonal injuries to the

victim's property rights or contract rights. They also are distinct

from the nonpersonal consequences of the injury, such as loss

of income. Because a suit brought under Title VII seeks to

vindicate tort-type rights, the violation of which causes physical

and psychological harm to the claimani, respondenis’ claims of

gender discrimination under Title VII are “personal injuries”

within the meaning of § 104(a)(2).”

24. Recently, in Owens v. Okure, 488 U.S. 235 (1989), this Court held

that the general limitations statute for personal injury actions applies to claims

brought under 42 U.S.C. § 1983, including a claim for gender discrimination

under the Equal Protection Clause. In so holding, this Court stated that

§ 1983 “ ‘confer[s] a general remedy for injuries to personal rights’ ” and that

“ *§ 1983 claims are best characterized as personal injury actions.’ ” /d. at 240

(citations omitted). See Goodman v. Lukens Steel Co., 482 U.S. 656 (1987) (a

violation of § 1981 is a “tort-type” injury for purposes of determining which

(continued...)

> +

B. Title VII back pay awards are damages within the

meaning of section 104(a)(2).

Section 104(a)(2) excludes “any damages” from gross

income. The regulations specify that “[t}he term ‘damages

received’ ” means “an amount received . . . through prosecu-

tion of a legal suit or action based upon tort or tort-type rights,

or through a settlement agreement.” Treas. Reg. § 1.104-1(c).

One court has held that an award of back pay received

through the prosecution of a Title VII action, being an equit-

able remedy, is not “damages” within the meaning of

§ 104(a)(2). Sparrow v. Commissioner, 1991 U.S. App. LEXIS

27991 (D.C. Cir. Nov. 26, 1991). In construing § 104(a)(2),

however, the Commissioner’s regulations define the term

“damages” to include “an amount” received on account of per-

sonal injuries, apparently eliminating any distinction between

damages in equity and at law.* Treas. Reg. § 1.104-1(c)

(emphasis added). The plain meaning of the term “damages”

also does not support a distinction between legal and equitable

relief. See Black’s Law Dictionary 351 (Sth ed. 1979) (“a

pecuniary compensation ... which may be recovered in the

courts”). The structure of § 104(a) also belies any distinction

between equitable and legal damages. Excludability turns on

the source of the amounts received, not their nature. See

IL.R.C. § 104(a)(1) (“amounts received under workmen's com-

pensation”); id. at § 104(a)(3) (“amounts received through

accident or health insurance”); id. at § 104(a)(4) (“amounts

received as a pension [or] annuity”); id. at § 104(a)(5) (“a-

mounts received . . . as disability income”).

24.(...continued)

State statute of limitations applies). Similarly, Title VII claims seek relief for

injuries resulting from discrimination -- personal injuries for purposes of

§ 104(a)(2). Metzger, 88 T.C. 834 (claims under §§ 198] and 1983 and

Title VII are actions for a personal injury).

25. This issue is discussed at greater length in respondents’ brief

. oP

Other provisions of the Code explicitly refer to equitable

and legal actions when appropriate. See, e.g., 1.R.C. § 6305(b)

(1989) (removing from jurisdiction of United States courts “any

action, whether legal or equitable” brought to review certain tax

collections). Absent any evidence to the contrary, the plain

meaning of the term “damages” should prevail and, therefore,

§ 104(a)(2) applies to back pay awards under Title VII despite

their equitable nature. Escondido Mutual Water Co. v. LaJolla

Band of Mission Indians, 466 U.S. 765, 772 (1984) (“[s]ince it

should be generally assumed that Congress expresses its

purposes through the ordinary meaning of the words it uses, we

have often stated that ‘[a]bsent a clearly expressed legislative

intention to the contrary, [statutory] language must ordinarily be

regarded as conclusive’ ”) (citations omitted).

CONCLUSION

The opinion of the Sixth Circuit Court of Appeals should

be affirmed.

Respectfully submitted,

C. CABELL CHINNIS, JR.

(Counsel of Record)

ELAHNA R. STROM

PHILIP L. GORDON

ELIZABETH B. DIXON

JULIE E. BARLAND

LATHAM & WATKINS

1001 Pennsylvania Avenue, N.W.

Washington, D.C. 20004

(202) 637-2200

a.

STFVEN R. SHAPIRO

ISABELLE KATZ PINZLER

AMERICAN CIVIL

LIBERTIES UNION

FOUNDATION

132 West 43 Street

New York, New York 10036

(212) 944-9800

ALISON C. WETHERFIFLD

MARTHA F. Davis

NOW LEGAL DEFENSE

AND EDUCATION

FUND

99 Hudson Street

New York, New York 10013

(212) 925-6635

JULIUS L. CHAMBERS

CHARLES STEPHEN RALSTON

NAACP LEGAL DEFENSE

AND EDUCATIONAL

FUND, INC.

99 Hudson Street

New York, New York 10013

(212) 219-1900

Dated: December 20, 199]