United States v. Burke

1992-05-26

Headline: Court rules that backpay settlements under Title VII are taxable, blocking exclusion as personal-injury damages and making employees who settle discrimination backpay claims subject to income tax.

Holding: The Court held that payments received as backpay in settlement of Title VII employment-discrimination claims are not excludable from gross income under Section 104(a)(2) of the tax code as damages for personal injuries, so recipients must pay income tax.

Real World Impact:

Makes Title VII backpay settlements taxable income for recipients.
Reduces net recovery for employees who settle discrimination backpay claims.
Guides employers and tax authorities on withholding and refunds in settlements.

Topics: employment discrimination, settlement taxes, backpay awards, income tax rules

Summary

Background

In 1984 an employee sued the Tennessee Valley Authority for paying lower salaries to women. A union joined and negotiated a settlement that paid $4,200 to the lead plaintiff and $5 million to other affected employees, including the three women at issue. Federal income tax was withheld from the larger payments, and the employees sought refunds, arguing the money was excluded from income as "damages on account of personal injuries."

Reasoning

The Court examined the tax code exclusion for "damages received . . . on account of personal injuries," and the IRS regulation tying that exclusion to tort or tort-like claims. The majority reasoned that Title VII’s remedy before 1991 focused on restoring lost wages through backpay and other equitable relief, not on compensating the full range of harms covered by tort law (like pain, suffering, or punitive awards). Because Title VII historically provided only backpay and injunctions, the Court concluded those settlement payments were not the kind of tort-based "personal injury" damages that the tax exclusion covers. The Court therefore reversed the Sixth Circuit and held the backpay was taxable.

Real world impact

Employees who receive Title VII backpay settlements cannot exclude those awards from gross income under the personal-injury exclusion in the tax code as it existed for this case. That means recipients must treat such settlement amounts as taxable income, and tax authorities and employers may withhold or collect taxes accordingly. The ruling resolved conflicting appeals-court decisions on this issue.

Dissents or concurrances

Justice Scalia would read "personal injuries" narrowly (mainly health harms) and criticized reliance on the IRS regulation; Justice Souter agreed with the result on narrow statutory grounds; Justice O'Connor dissented, arguing Title VII is tort-like and such recoveries should be excluded.