Commissioner v. Schleier

1995-06-14

Headline: Age-discrimination settlement payments are taxable: Court rules ADEA backpay and liquidated damages cannot be excluded under tax law, so claimants cannot keep those settlement amounts tax-free.

Holding: The Court held that §104(a)(2) does not allow exclusion of ADEA settlement payments; both backpay and liquidated damages are taxable and the lower court judgment was reversed.

Real World Impact:

Requires inclusion of ADEA backpay and liquidated damages as taxable income.
Resolves conflicting appeals-court rulings about taxability of ADEA settlements.
May increase tax bills for workers who settle age-discrimination claims.

Topics: tax rules for settlements, age discrimination, employment settlements, income tax

Summary

Background

Erich Schleier, a former United Airlines employee, was fired when he turned 60 and sued under the Age Discrimination in Employment Act (ADEA). After a jury found a willful violation, the parties settled for $145,629, split evenly between backpay and liquidated damages. Schleier reported the backpay as income but tried to exclude the liquidated damages. The Tax Court agreed with him and the Fifth Circuit affirmed, while other federal appeals courts reached different outcomes, so the Supreme Court took the case.

Reasoning

The main question was whether the tax code’s exclusion for “damages received on account of personal injuries or sickness” applies to ADEA recoveries. The Court said a taxpayer must meet two things: the lawsuit must be based on tort or tort-like rights, and the money must be received on account of a personal injury or sickness. The Court found ADEA recoveries fail both tests. The ADEA limits monetary awards to backpay and liquidated damages, and the Court relied on earlier decisions holding ADEA liquidated damages are punitive, not compensatory. Backpay reflects lost income caused by discharge, not payment for a personal injury, so it is not excludable.

Real world impact

As a result, people who receive ADEA settlements like Schleier’s must include both backpay and liquidated damages in gross income and may owe tax on those amounts. The ruling resolves conflicting appeals-court decisions and clarifies how the tax exclusion in §104(a)(2) is applied to discrimination settlements.

Dissents or concurrances

Justice O’Connor (joined by Justices Thomas and partly Souter) dissented, arguing age discrimination inflicts a personal injury and that ADEA damages should be excludable under the same regulation and precedents the majority considered. She emphasized jury rights, broad remedies, and longstanding IRS practice supporting exclusion.