Amicus Curiae Brief — United States v. Burke

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TABLE OF CONTENTS

STATEMENT OF INTEREST ..............ccccccccccseessseeees

BEATERS OF PACTS ...ccsccccsccscccccscccssssccscessssscees

INTRODUCTION: THE STATUTE AND

TENTED. deitisiaidisincesinitesierlenesicieininintsitnnetmnentienssaee

I.

II.

IT].

IV.

“PERSONAL INJURIES” IN THE SENSE OF

SECTION 104(A\X2) INCLUDE NONPHYSICAL

INJURIES AS WELL AS PHYSICAL

SUUUPTIID ‘sesccsinisissisdisielicasiticiiideitibaiindinatatriaeiieatinninaen

DISCRIMINATION IN VIOLATION OF TITLE

VII RESULTS IN “PERSONAL INJURIES,”

AND A SETTLEMENT AWARD ON A CLAIM

OF SUCH DISCRIMINATION IS RECEIVED

ON ACCOUNT OF PERSONAL INJURIES .....

“DAMAGES RECEIVED” IN THE SENSE OF

SECTION 104(AX2) INCLUDE ANY MONE.

TARY AWARD RECEIVED ON ACCOUNT OF

PERSONAL INJURIES ............ccccccccsssscsssssceee,

GOVERNMENT THEORIZING ABOUT “PER.

SONAL CAPITAL” OR “HUMAN CAPITAL,”

“ECONOMIC BENEFITS,” “ACCESSIONS TO

WEALTH” OR “ENHANCEMENTS OF

WEALTH” IS MISDIRECTED AND PRO.-

VIDES NO BASIS FOR LIMITING THE EX.

CLUSION PROVIDED BY SECTION

DUMEIEEIED vesecesonccccessosenousdecsncuscusseetesecocscsececeseees

~]

1]

TABLE OF AUTHORITIES

Cases: Page

Bent v. Commissioner, 87 T.C. 236 (1986), affd,

GL £S £8 2 EEE +)

Church v. Commissioner, 80 T.C. 1104 (1983) ...... i)

Coleman v. Commissioner, 791 F.2d 68 (7th Cir. ’

DE. ...cccecoeseccccetucenesisaniicnssmensieiaannaaaal 15,16

Commissioner v. Glenshaw Glass Co., 348 U.S. 426 ;

| | ae 14,15

Dizon v. United States, 381 U.S. 68 (1965) .......... 18

Downey v. Commissioner, 97 T.C. 150 (1991) ..... 910,19

Granzow v. Commissioner, 739 F.2d 265 (7th Cir. ;

RED .....cocceccecencanscocesusentsccuncusenensseneesaaaaaannat 16

Helvering v. Clifford, 309 U.S. 331 (1940) ............ 14

Langley v. Colonial Leasing Co. of New England,

ae O80 £2 Ss wees 13

Lonsdale v. Commissioner, 661 F.2d 71 (5th Cir.

BOE)... ccencevccnniensnmennnentienemmummnealaaaeaan 16

Lovell v. United States, 755 F.2d 517 (7th Cir.

RED ..cccccoccecccessuccesnsenneesensunuaiunennsnenenenennannannna 16

Medtronic. Inc. v. Intermedics, Inc., 725 F.2d 440 ,

SS 12

Metzger v. Commissioner, 88 T.C. 834 (1987), aff'd

without published opinion, 845 F.2d 1013 (3d

+ 2 ee ee )

Norfolk & Western R. Co. v. Liepelt, 444 U.S. 490

"BGI niccsenninnitilitsimanae 8

Pistillo v. Commissioner, 912 F.2d 145 (6th Cir.

ROBE cecccecececesesesitintitccseensoneneenennnsnnesanaaainaan 9,10

Price Waterhouse v. Hopkins, 490 U.S. 228

(RGD ceecececancscesstessesanestnseaneeen 10,11

Rickel v. Commissioner, 900 F.2d 655 (3rd Cir.

ROOD .ccccccconscsscocncensbansinseunecsieiasainaennenae 9,10

il

Table of Authorities Continued

Page

Roemer v. Commissioner, 716 F.2d 693 (9th Cir.

TESS TED SS oO TE )

Seay v. Commissioner, 58 T.C. 32 (1972) .............. 9

Sparrow v. Commissioner, No. 90-1151 (D.C. Cir.

EE SS 6,11,12

Stubbs, Overbeck & Associates, Inc. v. United States,

445 F.2d 1142 (5th Cir. 1971) .0...0.......cccccccc.. 18

United States v. Kolibski, 732 F.2d 1328 (7th Cir.

FE EE PETES SS 16

United States v. Thomas, 788 F.2d 1250 (7th Cir.),

cert. denied, 479 U.S. 853 (1986), appeal of

remand, 934 F.2d 840 (7th Cir. 1991) ........... 16

Statutes:

Civil Rights Act of 1964, Title VII, 42 U.S.C.

a csisesseouveccs 2,passim

es cccueswncecceccess 14

Omnibus Budget Reconciliation Act of 1989, Pub.

L. No. 101-239, § 7641(a), 103 Stat. 2379

a cnpeuccecenersccss 13

Revenue Act of 1918, ch. 18, § 213(b\6) ............. 13

Internal Revenue Code:

a seccnuccncccerecoeses 14,17

es cnppopnmanccceeencs 15

ee cncomecceucnseceoss 7

Cee ccmocneceececaes 13

Nee ee ccccocueusenens 3,passim

Ne snndbuuoaoeeces 3

Regulations: .

Treas. Regs. § 1.104-1(c) ..........cccccccsesccccescesssseeeeeee 8,11

Table of Authorities Continued

Page

Revenue Rulings:

Revenue Ruling 72-341, 1972-2 C.B. 32 .....ceee 17

Miscellaneous:

Federal Rules of Civil Procedure, Rules 1 and 2 . ll

Griswold. Cases and Materials on Federal Taxation

CEE: OM, BORED cocccvectvocenccinsstansussssseceidaanmisebuontns

IN THE

Supreme Court of the Gnited States

OCTOBER TERM, 1991

No. 91-42

UNITED STATES OF AMERICA,

Petitioner,

Vv.

THERESE A. BURKE, ET AL.,

Respondents.

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

BRIEF OF THE NATIONAL WOMEN’S LAW CENTER,

AS AMICUS CURIAE IN SUPPORT OF RESPONDENTS

Pursuant to Rule 37 of the Rules of this Court, the

National Women’s Law Center files this brief amicus

curvae in the above-entitled case. The brief supports

the position of the respondents and urges affirmance

of the decision of the Court of Appeals below:

The National Women’s Law Center has filed with

the Clerk of the Court the written consents of the

parties to the case.

STATEMENT OF INTEREST

The National Women’s Law Center (‘“NWLC’’) is

a non-profit legal advocacy organization dedicated to

to

the advancement and protection of women’s rights

and the corresponding elimination of sex discrimina-

tion from all facets of American life. Since 1972,

NWLC has worked to secure equal opportunity in the

workplace through the full enforcement of Title VII

of the Civil Rights Act of 1964, as amended, and

other civil rights statutes. Our interest in the instant

case is based on our particular and long standing

interest in assuring effective remedies for discrimi-

nation against women and minorities.

STATEMENT OF FACTS

The facts of the case are fully stated in the opinion

of the Court of Appeals below and by the parties. Of

particular importance, the Title VII' discrimination

action brought by the respondents was settled by the

payment of $5,000,000, to be distributed according to

a formula which took into account length of service

and rates of pay of the female employees who were

represented in the action. However, there was no

attempt to calculate specific awards of “‘back pay’’

which would equalize the aggregate wages or salaries

received by female employees to those of male coun-

terparts in the same wage or salary classifications.

Female employees had been paid for past services

the full amount of wages or salary due by contract

with TVA. The settlement proceeds were redress for

acts of discrimination in violation of federal statute.

and were not based on contract claims.

' Title VII of the Civil Rights Act of 1964, 42 U.S.C. &§ 2000e

et seq., as amended, hereinafter ‘Title VII’.

SUMMARY OF ARGUMENT

The issue here is whether the settlement proceeds

of a Title VII discrimination suit are excludable from

federal income taxation under the terms of section

104(a)(2) of the Internal Revenue Code.? That section

excludes from taxable income the amount of any dam-

ages received (whether by suit or agreement) on ac-

count of personal injuries or sickness (except punitive

damages in a case not involving physical injury or

physical sickness). In determining whether the amount

received by suit or agreement is on account of per-

sonal injury, the pertinent Treasury regulation states

that the term ‘“‘damages received’ means an amount

received through prosecution of a legal suit or action

based upon tort or tort-type rights or through a set-

tlement agreement entered into in lieu of such pros-

ecution.

The judicial decisions under section 104(a\(2) make

it clear that personal injuries include intangible (other

than physical or bodily) injuries to the person, in-

cluding violations of constitutional rights, defamation,

and various statutory provisions protecting personal

rights. Thus, the Court of Appeals below held that

amounts received in a Title VII action by way of

settlement of a gender-based discrimination suit are

not taxable under section 104(a)(2). This conclusion

follows from the view that gender-based discrimina-

tion is a personal injury not only resulting in economic

inferiority but damaging to intangible personal status,

self esteem, morale, and career prospects, i.e., overall

personally demeaning. Accordingly, an employer’s vi-

* Unless otherwise noted, all references are to the Internal

Revenue Code of 1986, as amended. 26 U.S.C. §§ 1 et seq.

olation of Title VII standards results in a tort-type

injury, monetary redress for which is excluded from

taxable income.

The petitioner (the ““Government’’) does not appear

in its brief to attack the conclusion that tort-like per-

sonal injuries include intangible and statutory (Title

VII) personal injuries. The Government has argued

for a non-statutory, non-regulation distinction be-

tween “‘economic’”’ recoveries and recoveries for in-

jury to “personal capital’ and “human capital,”

meaning harm to bodily parts.

Not only does this distinction have no support in

the statute or regulations, but it also makes no real

sense and would arbitrarily whittle down the exclusion

of section 104(a)(2). It is simply an attempt to revive

a long-abandoned Government position limiting sec-

tion 104(a\(2) to recoveries for injuries to bodily parts.

The concept of “personal capital” or “human capital”’

has no support in the tax law, which does not rec-

ognize a tax basis for gain or loss or for depreciation

or amortization of this alleged human or personal cap-

ital. Moreover, even if the notion had some scintilla

of tax validity, the Government argument reflects a

very strange view of human beings as a collection of

purely physical components, with no sensibilities, no

personality, no hopes and fears, no self esteem, and

none of those elements that make a human being

complete. These intangible elements are plainly also

a part of “personal capital,” if such a concept is to

be tax-cognizable.

Furthermore, the alleged contrast between ‘“‘eco-

nomic” recoveries for intangible injuries as “‘acces-

sions to” or “enhancements” of wealth, and recoveries

for injury to personal or human capital as non-acces-

**

ul

’ sions to or non-enhancements of wealth is an absurd

fiction. To illustrate, by virtue of an accident caused

by negligence, a secretary may lose the use of her

arms for a while. Nevertheless, redress therefor,

measured by lost wages, is an “‘economic’’ recovery.

If, by virtue of defamation, a person sustains injury

to his or her professional reputation, an award for

redress of the defamation, measured by loss of in-

come, is also an ‘“‘economic benefit.”” If a person re-

covers money damages for interference’ with

contractual relationships, once more the recovery,

which may be basically measured by loss of income,

is an “economic benefit.”” Finally, if a female em-

ployee is the victim of invidious and prohibited dis-

crimination, a monetary award as a remedy for this

personal injury is an “‘economic”’ benefit in the same

sense as the foregoing examples. Simply put, where

money is recovered for personal injuries, the money

is an “economic’’ benefit.

The Government attempts further to argue that the

money received in this case would have been taxable

if it had been received as additional wages for past

periods. Therefore, it ought to be taxable now. This

analysis is basically defective. As the facts of this

case establish, the settlement amounts received were

not equal to and did not have the same effects as

‘back pay’. Moreover, they were paid on account of

the personal injury of discrimination. The measure of

damages for the injuries should not be confused with

the nature of the claim. The victims of discrimination

did not sue because they were shortchanged by their

employer; they sued because discrimination, with all

of its concomitants, was illegal and gave rise to per-

sonal injuries.

Although the Government brief does not argue

about the term ‘“‘damages,”’ the Court of Appeals for

the D.C. Circuit has very recently held in Sparrow

v. Commissioner, No. 90-1151 (Nov. 26, 1991), that

an award pursuant to a Title VII action does not

constitute ‘damages’ under section 104(a)(2) because

Title VII involves only ‘“‘equitable’’ remedies under

historic distinctions between law and equity. This

strained and strange analysis ignores that for nu-

merous purposes of jurisdiction and procedure the dis-

tinction between law and equity disappeared decades

ago. Moreover, federal statutory provisions are not

the work of a chancellor in equity. Importantly, the

Court of Appeals opinion and decision totally ignores

the so-called clean-up doctrine pursuant to which

courts of equity have always been able to provide for

“damages at law” as a supplement to traditional eq-

uitable relief. Finally and decisively, as the Treasury

regulations to section 104(a\2) make clear, all mon-

etary amounts received for personal injuries are ex-

cludable as ‘“‘damages’’ from income.

Whatever casuistries have been advanced in the at-

tempt to defeat the tax exclusion provided for in sec-

tion 104(a\(2), the language of that section and the

Treasury regulations governs the case before this

Court, and it is clear that the section applies to this

case. If the executive and judicial branches of Gov-

ernment feel that the section 104(a\2) exclusion is

overbroad and reflects unsound policy, the remedy lies

with neither the executive branch nor the courts, and

certainly not in statutory construction by legerde-

main. Rather, the appropriate remedy is to seek pos-

sible limiting provisions in the statute through

Congressional action.

~

ARGUMENT

INTRODUCTION: THE STATUTE AND REGULATIONS

The starting point for analysis of an income tax

issue is the statute itself, i.e., the pertinent Internal

Revenue Code provision. As a former Solicitor Gen-

eral of the United States and distinguished law pro-

fessor observed long ago, “There is no use in thinking

great thoughts about a tax problem unless the

thoughts are firmly based on the controlling statute.”’

Griswold, Cases and Materials on Federal Taxation,

at 15 (4th ed. 1954). The pertinent statutory provision

is contained in section 104 of the Internal Revenue

Code, providing as follows:

(a) In General. -

Except in the case of amounts attributable

to (and not in excess of) deductions allowed

under section 213 (relating to medical, etc.,

expenses) for any prior taxable year, gross

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;

-_* *

... Paragraph (2) shall not apply to any pu-

nitive damages in connection with a case not

involving physical injury »r physical sickness.

*~* *

To the extent that Treasury regulations are not

inconsistent with the statute itself, they also have

binding legal effect. Pertinently here, the regulations

provide —

Damages received on account of personal in-

juries or sickness. - Section 104(a)(2) excludes

from gross income the amount of any dam-

ages received (whether by suit or agreement)

on account of personal injuries or sickness.

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 agreement entered into in lieu of

such prosecution.

Treas. Regs. § 1.104-1(c).

The statute and the Treasury regulations do not

warrant or reflect the “great thoughts’ which the

Government has offered in its brief. As Justice Black-

mun has observed, the purpose of section 104(a)(2)

may well be simply ‘‘to confer a humanitarian benefit

on the victim or victims of tort,” referring to a Dis-

trict Court opinion which noted that the statute was

‘intended to relieve a taxpayer who has the misfor-

tune to become ill or injured.” Norfolk & Western R.

Co. v. Liepelt, 444 U.S. 490, 501 (1980) (Blackmun,

J., dissenting).

I. “PERSONAL INJURIES” IN THE SENSE OF SEC-

TION 104(a)(2) INCLUDE NON-PHYSICAL INJURIES

AS WELL AS PHYSICAL INJURIES

Without exception as far as we know, the courts

have recognized that the term “personal injuries” in-

9

cludes intangible injuries as well as bodily or physical

injuries. See, e.g., Bent v. Commissioner, 87 T.C. 236

(1986), affd, 835 F.2d 67 (3d Cir. 1987) (violation of

First Amendment rights); Church v. Commissioner,

80 T.C. 1104 (1983) (libel suit); Seay v. Commissioner,

58 T.C. 32 (1972) (injury to reputation); Metzger v.

Commissioner, 88 T.C. 834 (1987), aff'd without pub-

lished opinion, 845 F.2d 1013 (3d Cir. 1988) (gender

and national origin d‘scrimination); Downey v. Com-

missioner, 97 T.C. 150 (1991) (violation of ADEA):

Roemer v. Commissioner, 716 F.2d 693 (9th Cir.

1983), rev’g 79 T.C. 398 (1982) (defamation); Rickel

v. Commissioner, 900 F.2d 655 (8d Cir. 1990), affg

in part and rev’g in part 92 T.C. 510 (1989) (violation

of ADEA). A detailed analysis of the concept of ‘‘per-

sonal injuries’ appears in the recent opinion in Dow-

ney v. Commissioner, 97 T.C. 150, 157-64 (1991), as

well as in the opinion below in this case.

II. DISCRIMINATION IN VIOLATION OF TITLE VII RE-

SULTS IN “PERSONAL INJURIES,” AND A SET-

TLEMENT AWARD ON A CLAIM OF SUCH

DISCRIMINATION IS RECEIVED ON ACCOUNT OF

PERSONAL INJURIES

The opinion of the Court below concluded that dis-

crimination in violation of Title VII undoubtedly re-

sulted in personal injuries. This followed the view of

that same Court of Appeals in Pistillo v. Commis-

stoner, 912 F.2d 145 (6th Cir. 1990), rev’g 57 T.C.M.

(CCH) 874 (1989), that discrimination in violation of

the ADEA gave rise to personal injuries. The Court

of Appeals for the Third Circuit has also held that

age discrimination resulted in personal injuries. Rickel

v. Commissioner, 900 F.2d 655 (3d Cir. 1990), affg

in part and rev’g in part 92 T.C. 510 (1989).

10

The Tax Court in the Rickel and Pistillo cases had

denied an exclusion for back pay awards on the

ground that the damages received, or part of the

damages, were similar to damages for breach of con-

tract and, in any event, were substitutes for taxable

income. However, after the Courts of Appeal reversed

these analyses and conclusions, the Tax Court in Dow-

ney v. Commissioner, 97 T.C. 150, 168-70 (1991), ex-

plicitly overruled its own decisions in the Rickel and

Pistillo cases, on the ground that both the Tax Court

previously and the Commissioner had confused the

nature of discrimination claims with the consequences

of the injury and with the nature of relief requested

by taxpayers:

We recognize that petitioner’s recovery here

of lost wages is similar to a recovery

petitioner might have received in settlement

of a contract claim. The record, though, con-

tains no evidence that petitioner had any sep-

arate contractual claim .... requesting lost

wages as relief; and we have found that

petitioner received the amount at issue in

settlement of the ADEA claim, not any other

claim. Petitioners, thus, were entitled to ex-

clude under section 104(a\2) the nonliqui-

dated damages received in settlement of the

ADEA claim. 97 T.C. at 169-70.

Focusing particularly on Title VII which was the

basis for the settlement award here, the purposes of

the Title, as stated by Justice O’Connor, are ‘‘to deter

conduct which has been identified as contrary to pub-

lic policy and harmful to society as a whole,” as well

as to make persons whole for the injury suffered on

account of discrimination. Price Waterhouse v. Hop-

1]

kins, 490 U.S. 228, 264 (1989) (O’Connor, J., con-

curring).

We do not understand that the Government has

contended in its brief that Title VII does not involve

tort or tort type rights giving rise to personal injury;

rather, in a convoluted way, the Government argues

that a “‘back pay’”’ award, which might have been paid

as additional taxable wages if the employer had not

engaged in discrimination, ought to be taxable just

as such wages would be, notwithstanding section

104(aX2). This contention is specifically considered be-

low (pages 17-19, infra).

III. “DAMAGES RECEIVED” IN THE SENSE OF SEC-

TION 104(a)(2) INCLUDE ANY MONETARY AWARD

RECEIVED ON ACCOUNT OF PERSONAL INJU-

RIES

The Treasury regulations define ‘damages re-

ceived” as amounts received through a legal suit or

settlement agreement based upon tort or tort type

rights. Treas. Regs. § 1.104-l(c). Obviously the ref-

erence to a legal suit is not an effort to distinguish

between actions at law or actions at equity. The plain

meaning is an action brought in a court. See Federal

Rules of Civil Procedure, Rules 1 and 2.

Although the Government brief does not appear to

dispute that ‘‘damages’’ were received in the case

before the Court, the Court of Appeals for the D.C.

Circuit has recently made this an issue. That Court

of Appeals held in Sparrow v. Commissioner, No. 90-

1151 (Nov. 26, 1991), that because Title VII is in-

tended to provide equitable relief, and ‘‘damages”’ are

historically a remedy at law, an amount received in

a Title VII action for discrimination cannot be ‘‘dam-

ages’’ within the meaning of section 104(a)2).

12

—

The decision in Sparrow is unique, as far as we

know, in holding that an amount received for the

personal injuries resulting from discrimination does

not qualify as “damages.” This belated new reading

of section 104(a\(2) has no basis.

First, Title VII is not the creation of a chancellor

in equity; it is part of a federal statute which reflects

a Congressionally-created offense or violation, sets

forth procedures, and sets forth remedies. The statute

may have equitable overtones in its provisions for

injunctive relief, but it is not a branch of equity jur-

isprudence.

Second, although the Court in the Sparrow case

correctly noted that “damages” historically were a

remedy at law, the Court wrongly concluded that

“damages” therefore were not available in equity.

Traditionally, courts of equity were not limited to so-

called equitable remedies, and frequently applied the

equitable clean-up doctrine to award “damages at

law” in addition to “equitable” relief. The Court of

Appeals in Medtronic, Inc. v. Intermedics, Inc., 725

F.2d 440 (7th Cir. 1984), has focused on this historical

power of equity courts:

A suit seeking a mixture of legal and eq-

uitable relief could have been brought then,

if at all, only in an equity court. A law court

could not give equitable relief, incidental or

otherwise, while a plaintiff in equity could

ask the equity court to grant him legal as

well as equitable relief—for example, dam-

ages as well as an injunction—under the eq-

uity clean-up doctrine.

725 F.2d at 442 (emphasis added), citing 1 Pomeroy,

A Treatise on Equity Jurisprudence, §§ 236-41

13

(1881); Wright v. Scotton, 13 Del. Ch. 402, 417-18,

121 A. 69, 76 (Del. Super. Ct. 1923); Dawson & Pal-

mer, Cases on Restitution, 146-51 (2d ed. 1969). See

also Langley v. Colonial Leasing Co. of New England,

707 F.2d 1, 6 (1st Cir. 1983) (‘‘Given the claims for

rescission, a chancellor would have had jurisdiction

over Langley’s whole suit against Major, including the

claims for damages at law, under the so-called eq-

uitable clean-up doctrine.’’). Thus, while it is true that

courts of law could not order the remedies exclusively

available in courts of equity, courts of law had no

monopoly on the awarding of damages.

Third, section 104(a)(2), as originally enacted, clearly

contemplated that all recoveries for personal injuries,

whether through insurance or otherwise, and not just

through an award of ‘“‘damages,”’ were excluded from

income. Section 213(b)\(6) of the Revenue Act of 1918

first enacted, in a single provision, the income exclu-

sions now contained in sections 104(a)(1) through (3)

of the Code. It therefore appears that in this legis-

lation Congress intended generally that recoveries for

personal injuries be excludable from income.

Fourth, as limited by the 1989 amendment to sec-

tion 104(a)(2),? the only personal injury recoveries not

excludable from income for tax purposes are punitive

damages, and then only in a case that does not in-

volve a physical injury. Accordingly, with this sole

exception delineated by the Congress, all recoveries

* Section 104 was amended by the Omnibus Budget Reconcil-

iation Act of 1989, Pub. L. No. 101-239, § 7641(a), 103 Stat.

2379 (1989), to provide that section 104(a\2) “shall not apply

to any punitive damages in connection with a case not involving

physical injury or physical sickness.”’

14

for personal injuries, including, é.g., amounts re-

covered for pain and suffering, are non-taxable.

The distinction between damages at law and eq-

uitable damages is thus no distinction at all for pur-

poses of section 104(a)(2). As this Court noted long

ago, in rejecting a taxpayer’s hypertechnical argu-

ment based on historic property law, “the legal par-

aphernalia which inventive genius may construct as

a refuge from surtaxes should not obscure the basic

[tax] issue.” Helvering v. Clifford, 309 U.S. 331, 334

(1940). The same observation seems appropriate when

courts or administrators seek, by technical niceties or

casuistries, simply to increase the federal treasury.

IV. GOVERNMENT THEORIZING ABOUT “PERSONAL

CAPITAL” OR “HUMAN CAPITAL,” “ECONOMIC

BENEFITS,” “ACCESSIONS TO WEALTH” OR “EN-

HANCEMENTS OF WEALTH” IS MISDIRECTED

AND PROVIDES NO BASIS FOR LIMITING THE EX-

CLUSION PROVIDED BY SECTION 104(a)(2)

The government seizes upon the phrases ‘‘accession

to wealth” and “enhancement of wealth” as they ap-

pear in the case of Commissioner v. Glenshaw Glass

Co., 348 U.S. 426 (1955), proposing that these phrases

limit the exclusion provided by section 104(a\2). How-

ever, the Glenshaw Glass case deals only with the

question of what is income under section 22(a) of the

Internal Revenue Code of 1939 (section 61 of the

present Internal Revenue Code). The issue was

whether punitive antitrust damages, i.e., two-thirds

of treble antitrust damages, constituted gross income

for tax purposes. The Court held Sweepingly that any

“accessions to wealth’? may constitute gross income,

observing the “all-inclusive nature of Statutory gross

income.’’ 348 U.S. at 431, 432 n.11. The Glenshaw

15

Glass case was not a section 104(a)(2) case and did

not involve an attempt by this Court to limit the

exclusion of that section. To the contrary, since the

tax concept of income is generally ‘“‘all-inclusive,’”’ that

decision, if anything, emphasized the importance of

overriding statutory exclusions. Section 61(a) begins

by stating ‘‘Except as otherwise provided in this sub-

title, gross income means all income from whatever

source derived ... .”” The case now before the Court

deals with an exception to income, not the general

rule. The exception cannot be limited by references

to the broad scope of the general rule, as the Gov-

ernment has attempted to argue.

In its brief, the Government seeks to develop a

concept for tax purposes of ‘personal capital’ or

“human capital,” redress for injury to which produces

no ‘“‘economic benefit.”” On the other hand, monetary

damages for intangible injuries, it is asserted, rep-

resent ‘‘economic benefits,’’ and therefore, in some

way not readily apparent, economic benefits do not

enjoy the protection from tax provided by section

104(a\(2). This theorizing not only has no support in

the tax law generally, but is simply an attempt to

engraft a limitation—which appears nowhere else—on

section 104(a)(2).

When taxpayers have attempted to invoke the no-

tion of “personal capital” or ‘human capital” for de-

preciation or amortization deductions to their tax

advantage, the courts have contemptuously dismissed

these efforts. As the Court of Appeals for the Seventh

Circuit has noted in the case of Coleman v. Com-

missioner, 791 F.2d 68, 70 (7th Cir. 1986):

The billingsgate in appellants’ briefs is cus-

tomary in cases of this nature. Coleman says

16

that wages may not be taxed because they

come from his person, a depreciating asset.

The personal depreciation offsets the wage,

leaving no net income. Coleman thinks that

only net income may be taxed under the Six-

teenth Amendment—net income as Coleman-

defines it, rather than as Congress does. ...

These are tired arguments.

That Court referred to “hundreds of other cases”’

holding the same, citing as among them, United States

v. Thomas, 788 F.2d 1250, 1253 (7th Cir.), cert. de-

nied, 479 U.S. 853 (1986), appeal of remand, 934 F.2d

840 (7th Cir. 1991); Lovell v. United States, 755 F.2d

017 (7th Cir. 1984); Granzow v. Commissioner, 739

F.2d 265, 267 (7th Cir. 1984); United States v. Ko-

libski, 732 F.2d 1328, 1829 & n.1 (7th Cir. 1984). See

also Lonsdale v. Commissioner, 661 F.2d 71, 72 (5th

Cir. 1981).

The Government suggests that damages on account

of injuries to human capital would be nontaxable with-

out regard to section 104(a)(2), while damages for

other, intangible injuries result in “economic bene-

fits,” which are income taxable despite section

104(a)(2). However, in all monetary recovery cases for

personal injuries there is in economic terms an acces-

sion to wealth, an enhancement of wealth, and an

economic benefit. Were the notions proposed by the

Government valid, section 104(aX2) would serve no

purpose whatever. Recoveries for bodily injury would,

without regard to that section, be nontaxable; other

recoveries would be taxable.

The attempt to distinguish “economic” recoveries

from human capital’ recoveries is also inherently

illogical. All dollar recoveries have an economic effect

17

and enhance economic wealth, unless property with

an equal or greater tax basis is exchanged for the

money. A recovery for bodily injury, which tempo-

rarily prevents working for wages, results in an ‘‘eco-

nomic benefit’’ where the award is measured by a

loss of wages. In other cases, e.g., libel to professional

reputation, damages may well be measured by an es-

timated loss of income, which, had it been received,

would be fully taxable. These damages also produce

an economic benefit; nevertheless the damages are

excludable from income under section 104(a)(2).

The Government also asserts that Title VII is sim-

ply a “‘back pay” statute as if it were no more than

a minimum wage statute. Pursuant to this charac-

terization of Title VII, the Government contends that

‘‘back pay,” if it had been received as wages in past

periods, would have been fully taxable. Therefore, the

argument runs, the back pay allegedly received by

respondents under this back pay statute simply re-

dresses a shortage of compensation income and should

also be taxable. This is a circular argument: compen-

sation for services is taxable; because the damages

are allegedly equal to compensation income, the sec-

tion 104(a)(2) exclusion should not apply; therefore the

damages are taxable as compensation income.

The Government has of course omitted to mention

this doctrine in the Treasury regulations drafted by

the Government. There is a ruling, Revenue Ruling

72-341, 1972-2 C.B. 32, which reaches the Govern-

ment’s conclusion on an admitted back pay award,

but the ruling interprets only section 61 of the In-

ternal Revenue Code. It contains no reference to sec-

tion 104(a\X2) or a limitation thereon. Moreover,

contrary to the Government’s assumption (Govern-

18

ment Br. 19), rulings are not the equivalents of Treas-

ury regulations and have no authoritative standing.

See Dixon v. United States, 381 U.S. 68, 73 (1965)

(Congress has not given rulings the force of law);

Stubbs, Overbeck & Associates, Inc. v. United States.

445 F.2d 1142, 1146-47 (Sth Cir. 1971) (a “ruling is

merely the opinion of a lawyer in the agency’’).

Finally, the Government's argument that the set-

tlement amounts in this case are simply back pay,

and taxpayers will be taxed as they should be if the

Government prevails, is factually incorrect. The set-

tlement awards were not measured arithmetically as

the equivalents of inadequate compensation. The

awards, compared to annually received wages, are

lump sum, thereby if taxable possibly throwing tax-

payers into a higher bracket under section 1 of the

Internal Revenue Code. The awards, compared to ad-

ditional compensation which might have been paid in

prior years, are deferred without interest; they do

not take into account time values. The victims of Title

VII discrimination in this case also for years sustained

a lower standard of living, lower prospects of pro-

motion, a loss of self-esteem, stigmatization in effect

as “‘mere female” employees, and other intangible

injuries resulting from the discrimination. The settle-

ment awards certainly provide redress for these in-

tangibles as well as past discriminatory lower wages.

In dealing with the argument that the taxpayers in

this case should be taxed because additional compen-

sation for past years would have been taxable, the

Tax Court has concluded, “Whether the damages paid

to the tort victim reflect a substitute for amounts or

items otherwise taxable or a substitute for amounts

or items to be enjoyed without a tax consequence is

19

irrelevant.”” Downey v. Commissioner, 97 T.C. at 163-

64. If any party is to limit a Congressional provision

for exclusion, it should not be the tax collecting

administration. Nor do courts have the power to re-

write statutes according simply to their views of sound

policy. The prerogative of revising the substance of

a Congressional Act belongs to the Congress.

Section 104(a)(2) reflects a policy that the Federal

Government ought not take its usual tax percentage

cut out of situations of misfortune, misery, unfairness

and justified unhappiness. The Internal Revenue Ser-

vice is not entitled to change this statutory policy.

20

CONCLUSION

For the reasons set forth here, we respectfully re-

quest that the opinion and decision of the Court below

be affirmed.

Respectfully submitted,

WALTER J. ROCKLER

Counsel of Record

ARNOLD & PORTER

1200 New Hampshire Ave., N.W.

Washington, D.C. 20036

(202) 872-6789

Attorney for Amicus Curiae

Of Counsel:

JONATHAN B. BurRNs

ARNOLD & PORTER

1200 New Hampshire Ave., N.W.

Washington, D.C. 20036

December 23, 199]