GENDER, RACE, AND DISABILITY DISCRIMINATION AWARDS ARE RULED EXCLUDABLE.

Rev. Rul. 93-88

ISSUES

(1) Is an amount received in satisfaction of a claim of gender discrimination under Title VII of the Civil Rights Act of 1964, as amended in 1991, excludable from gross income as damages for personal injury under section 104(a)(2) of the Internal Revenue Code?

(2) Is an amount received in satisfaction of a claim of racial discrimination under 42 U.S.C. section 1981 and Title VII of the Civil Rights Act of 1964 excludable from gross income as damages for personal injury under section 104(a)(2) of the Code?

FACTS

Situation 1. A, an individual, began working for X, a corporation, in 1985. A brought suit against X in 1992, alleging that A had been denied a promotion in 1992 on the basis of A's gender, in violation of the disparate treatment discrimination provisions of Title VII of the Civil Rights Act of 1964, as amended in 1991 (Title VII), 42 U.S.C. sections 1981a, 2000e to 2000e-17. In the lawsuit, A claimed back pay and compensatory damages for emotional pain and suffering, inconvenience, mental anguish, and other nonpecuniary losses. After a jury trial, A was awarded $10x in back pay and $20x in compensatory damages.

Situation 2. B, an individual, began working for Y, a corporation, in 1985. B brought suit against Y in 1992, alleging that B had been denied a promotion in 1992 on the basis of B's race, in violation of the racial discrimination provisions of section 16 of the Civil Rights Act of 1870, 42 U.S.C. section 1981 (section 1981), and Title VII, 42 U.S.C. sections 2000e to 2000e-17. In the lawsuit, B claimed back pay and compensatory damages for emotional pain and suffering, inconvenience, mental anguish, and other nonpecuniary losses. After a jury trial, B was awarded $10x in back pay and $20x in compensatory damages.

LAW AND ANALYSIS

Section 61(a) of the Code provides that, except as otherwise provided by law, gross income includes all income from whatever source derived.

Section 104(a)(2) of the Code provides generally that gross income does not include the amount of any damages received (whether by suit or agreement) on account of personal injuries or sickness.

Section 1.104-1(c) of the Income Tax Regulations provides, in part, that 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.

Title VII provides that it is an unlawful employment practice for the employer "to discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment because of such individual s race, color, religion, sex, or national origin." 42 U.S.C. section 2000e-2(a)(1). This type of unlawful employment practice is referred to as "disparate treatment" discrimination.

In addition, Title VII provides that it is an unlawful employment practice for an employer to classify employees or applicants for employment in any way which would tend to deprive them of employment opportunities or otherwise adversely affect their employment status if such classification (1) is not necessary for business purposes, and (2) tends to discriminate on the basis of race, color, religion, sex, or national origin. 42 U.S.C. section 2000e-2(a)(2). This type of unlawful employment practice is referred to as "disparate impact" discrimination.

Title VII provides for action by the dual Employment Opportunity Commission as well as for a private cause of action by the party who was discriminated against. 42 U.S.C. section 2000e-5. Under section 2000e-5, if a court finds that an employer has intentionally engaged in an unlawful employment practice, that court may order such affirmative action as is appropriate, including reinstatement, with or without back pay, or any other equitable remedy that the court deems appropriate. However, if a court orders back pay, with or without reinstatement, back pay liability may not accrue from a date more than two years before the filing of the charge with the dual Employment Opportunity Commission. 42 U.S.C. section 2000e-5(g). The remedies provided by section 2000e-5 are available in both disparate treatment and disparate impact cases.

Title VII also provides that, in addition to back pay available under section 2000e-5(g), the complaining party may recover compensatory and punitive damages under section 1981a against an employer who engaged in disparate treatment discrimination. 42 U.S.C. section 1981a. That section is generally effective on or after November 21, 1991. Prior to the enactment of section 1981a, a party complaining under Title VII could only recover back pay under section 2000e-5(g).

Under section 1981a of Title VII, compensatory damages are available for future pecuniary losses, emotional pain, suffering, inconvenience, mental anguish, loss of enjoyment of life, and other nonpecuniary losses. 42 U.S.C. section 1981a(b)(3). No greater level of employer culpability need be shown to recover compensatory damages under section 1981a than that necessary to receive back pay under section 2000e-5(g). However, under section 1981a, compensatory damages do not include back pay, interest on back pay, or any other type of relief available under section 2000e-5(g). 42 U.S.C. section 1981a-(b)(2).

Title VII limits the sum of compensatory and punitive damages that may be awarded under section 1981a against an employer who engaged in disparate treatment discrimination. This limitation is based on the number of persons employed by the employer. 42 U.S.C. section 1981a(b)(3). No compensatory or punitive damages may be awarded against an employer who engaged only in disparate impact discrimination. 42 U.S.C. section 1981a(a)(1).

Under section 1981a of Title VII, claimants of racial discrimination who are eligible to recover damages under section 1981, 42 U.S.C. section 1981 (section 1981), may not recover any damages under section 1981a. 42 U.S.C. section 1981a(a)(1). These claimants may, however, recover back pay under section 2000e-5(g).

Section 1981 provides a federal remedy for discrimination in private employment on the basis of race. Equitable and legal relief, including a full range of compensatory damages as well as punitive damages, are available under section 1981. Johnson v. Railway Express Agency, 421 U.S. 454 (1974). The compensatory damages available in a section 1981 discrimination case include back pay.

In United States v. Burke, 112 S.Ct. 1827 (1992), the Supreme Court considered the excludability of damages received for disparate impact gender discrimination under Title VII of the Civil Rights Act, as in effect prior to the 1991 amendment. Pursuant to section 2000e- 5(g), the taxpayers in Burke received only back pay. The Court stated that regulation section 1.104-1(c) has "linked the identification of a personal injury for purposes of section 104(a)(2) to traditional tort principles." 112 S.Ct at 1870. The Court made clear that discrimination can constitute a personal injury for purposes of section 104(a)(2) if the relevant cause of action provides a tortlike remedy. It then examined the nature of a traditional tort and concluded that the most important characteristic was the availability of a broad range of damages, such as damages for emotional distress, pain and suffering, and punitive damages where appropriate. 112 S.Ct. at 1870-72. Because such a broad range of damages was not available under the pre-1991 version of Title VII at issue in Burke, the Court concluded that the pre-1991 Title VII remedy, back pay under section 2000e-5(g), was not excludable from gross income under section 104(a)(2) of the Code as damages received on account of personal injury.

The Court in Burke contrasted pre-1991 Title VII with section 1981, which provides for a full range of compensatory damages, as well as punitive damages in appropriate cases. The Court, at 112 S.Ct. 1873-74, indicated that all amounts recovered under section 1981, including back pay, would be excludable.

Title VII, as amended in 1991, permits a victim of disparate treatment discrimination not covered by section 1981 to recover, in addition to back pay, a full range of compensatory damages, as well as punitive damages where appropriate. Section 1981 also permits victims of race discrimination to recover a full range of compensatory damages, including back pay, and punitive damages where appropriate. Thus, Title VII and section 1981 currently provide the broad range of traditional tort remedies that the Supreme Court in Burke said would warrant excludability under section 104(a)(2) of the Code.

Accordingly, in Situation 1, A may exclude from gross income the $20x in compensatory damages and the $10x in back pay received under Title VII. In situation 2, B may exclude from gross income the $20x in compensatory damages and the $10x in back pay received under section 1981 and Title VII.

HOLDINGS

(1) Compensatory damages, including back pay, received in satisfaction of a claim of disparate treatment gender discrimination under Title VII of the Civil Rights Act of 1964, as amended in 1991, are excludable from gross income as damages for personal injury under section 104(a)(2) of the Code. This is true even if the compensatory damages in such a case are limited to back pay. However, back pay received by a victim of disparate impact gender discrimination is not excludable from gross income.

(2) Compensatory damages, including back pay, received in satisfaction of a claim of racial discrimination under 42 U.S.C. section 1981 and Title VII of the Civil Rights Act of 1964 are excludable from gross income as damages for personal injury under section 104(a)(2) of the Code. This is true even if the compensatory damages in such a case are limited to back pay.

Similar results will apply to amounts received under the Americans With Disabilities Act, 42 U.S.C. sections 12101-12213.

DRAFTING INFORMATION

The principal author of this revenue ruling is Patrick S. Kirwan of the Office of the Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. Kirwan on (202) 622-4920 (Not a toll-free call).