[Congressional Record Volume 146, Number 93 (Tuesday, July 18, 2000)]
[Senate]
[Pages S7162-S7164]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. GRASSLEY (for himself, Mr. Robb, Ms. Collins, and Mr. 
        Daschle):
  S. 2887. A bill to amend the Internal Revenue Code of 1986 to exclude 
from gross income amounts received on account of claims based on 
certain unlawful discrimination and to allow income averaging for 
backpay and

[[Page S7163]]

frontpay awards received on account of such claims, and for other 
purposes.


                 CIVIL RIGHTS TAX FAIRNESS ACT OF 2000

  Mr. GRASSLEY. Mr. President, I rise today to introduce the Civil 
Rights Tax Fairness Act of 2000. I am being joined by Senator Robb in 
this effort. Civil rights legislation has been in force throughout this 
country for nearly thirty years; its purpose being to provide real 
remedies to victims of discrimination.
  The Civil Rights Tax Fairness Act restores certain remedies for 
victims of discrimination by eliminating taxes on emotional distress 
awards. This tax was incorporated into the Small Business Job 
Protection Act of 1996, making the taxation of awards received in 
discrimination cases involving back wages or non-physical injuries ( 
including emotional distress) taxable. The result of the 1996 
legislation was to discriminate against people involved in civil rights 
cases. People who received damage awards because of a bar-room brawl or 
slip-and-fall incident, often caused by simple negligence, get tax free 
awards. While, for similar types of psychological injuries caused by 
intentional discrimination the damages are taxed. The result of this 
taxation is that the attorneys and government make out better than the 
victims who had their rights violated.
  A second part of The Civil Rights Tax Fairness Act changes the 
current law, which requires people who receive back pay awards in 
discrimination cases to be bumped up into a higher tax bracket. When 
back pay awards are received by a person in a case the IRS considers it 
taxable income to be taxed in the year it is received, even though the 
award received covers many years of lost wages. Currently no averaging 
of back pay awards is allowed, but The Civil Rights Tax Fairness Act 
attempts to address this problem. The act provides for income averaging 
of back pay awards, making it possible for the award to be taxed over 
the number of years it was meant to compensate.
  The third area that The Civil Rights Fairness Act attempts to combat 
is the double taxation of attorneys' fees that takes place under 
current law. Presently individuals who receive awards end up having to 
include in that award their attorneys' fee. This fee can end up being 
larger than the actual award received by the plaintiff. The current tax 
implications in the law require the plaintiff to pay taxes on their 
award and on the attorneys fees received by their lawyer.
  One real life example recently brought to my attention involves an 
Iowa citizen named Don Lyons. Mr. Lyons, a man attempting to do the 
honorable thing by helping out a co-worker with filing a sex 
discrimination complaint against their employer, was unjustly 
retaliated against. After prevailing in court and receiving a $15,000 
remitted judgment, Mr. Lyons then had to deal with the present tax 
laws, which not only devoured his judgment, but required him to 
actually pay thousands of more dollars to the government in taxes.
  First, Mr. Lyons had to pay taxes on the $15,000 he received as 
punitive damages from his employer. After he pays his taxes he is left 
with $9,533. However, when Mr. Lyons takes into account the taxes that 
he has to pay on the combination of his settlement and attorneys' fees, 
he ends up owing $67,791 in taxes. When you subtract the $9,533 Mr. 
Lyons had left from the initial judgment he ends up still owing the 
government $58,236 in taxes. Mr. Lyons attorney, Ms. Victoria L. 
Herring, also has to pay taxes on the fee she received for taking Mr. 
Lyons case. Mr. Lyons ends up paying taxes on money that he never even 
received, making him a good example of why it is important to pass The 
Civil Rights Tax Fairness Act and end double taxation. Everyone should 
agree that this is a extreme example of unfair taxation.
  Mr. Lyons helped out a co-worker, was attacked by his employer, and 
received damages in a court of law. People count on the legal system to 
protect them and when their civil rights are violated the system needs 
to function properly. It is disheartening to learn that, in actuality, 
Mr. Lyons is going to be taken to the cleaners by the government tax 
system, and as a result, he ends up owing $58,236 to the government for 
the ``privilege'' of having won his retaliation case.
  It seems to me that there is something fundamentally wrong with the 
law when it hurts the people it is supposed to protect. This being 
said, it is time to change the mistakes made in the past by passing the 
Civil Rights Tax Fairness Act 2000. This bill will go a long way toward 
helping out victims of discrimination by eliminating taxes on emotional 
distress awards, ending lump-sum taxation, and ending double taxation. 
The changing of the law will have positive effects on citizens like Mr. 
Lyons, allowing similar victims to keep more of their awards. At the 
same time, it will be beneficial for business, since they will be able 
to settle discrimination claims for lower settlements.
  I ask unanimous consent to have printed in the record after my 
remarks the letter I received from Mr. Lyon's attorney, Victoria L. 
Herring. Ms. Herring does an outstanding job of quantifying and 
personalizing the importance of the Civil Rights Tax Fairness Act.
  There being no objection, the letter was ordered to be printed in the 
Record, as follows:

                                                November 30, 1999.

     Re Tax implications of civil rights litigation.

     Senator Charles Grassley,
     U.S. Senate,
     Washington, DC.
     Senator Tom Harkin,
     U.S. Senate,
     Washington, DC.
       Dear Senators: I write you as an attorney of long-standing 
     in Des Moines and an Iowa citizen who represents other Iowans 
     in employment-related matters. I write to bring to your 
     attention a problem that you should know of (as legislation 
     is now pending to cure the problem, H.R. 1997), but perhaps 
     the effect of the present status of the law escaped you.
       As you know, for some thirty years civil rights legislation 
     has been in force in this country; that includes Title VII, 
     the ADA, the ADEA, and other types of such statutes. As a 
     part of the legislative effort to provide remedies to victims 
     of discrimination, Congress also passed an attorney fees 
     provision that entitles a successful plaintiff to have his or 
     her attorney fees and expenses compensated by the losing 
     defendant, subject to the trial court's discretion. 
     Certainly, this legislation had a salutary effect in ending 
     some of the worst vestiges of discrimination and seeing that 
     the litigators were paid for their efforts as ``private 
     attorneys general''. The United States Supreme Court has 
     endorsed this concept in numerous cases.
       What I now bring to your attention is the fact that all of 
     this legislation has been rendered meaningless and, indeed, 
     punitive against plaintiffs and their attorneys, by the 
     Congress's passage in 1996 of the Small Business Protection 
     Act and the various tax laws enacted by Congress over the 
     years. I have a real life example to bring to your attention, 
     in the hope that you will see how unfair and offensive is the 
     present state of the law. In fact, in light of the law as it 
     is today, it is entirely possible that no attorney in his or 
     her right mind would take any plaintiff's civil rights 
     case, and that no person in his or her right mind would 
     undertake to litigate civil rights discrimination no 
     matter how much they were harmed by such actions.
       First, it is my understanding that the tax laws now require 
     the payment of taxes upon any and all sums obtained in 
     litigation or settlement that are not clearly related to 
     ``personal physical injury''. As most (if not all) civil 
     rights and discrimination cases brought under Title VII, the 
     ADA, etc., rarely involve ``personal physical injury'', most 
     (if not all) jury verdicts, judge awards and/or settlements 
     are entirely taxable to the victim of discrimination. Perhaps 
     that was truly the intent of Congress in its 1996 passage of 
     the amendment to Internal Revenue Code Section 104. If so, 
     then victims of discrimination certainly do owe taxes on 
     whatever they might receive by way of verdict, judgment or 
     settlement, and should pay those taxes. Of course, that 
     frequently prevents settlements from occurring or raises the 
     cost of the settlements, but that might also be within 
     Congress's intent in passing the legislation. (That less than 
     salutary effect of the 1996 amendment is one reason quite a 
     variety of groups have supported the proposed bill, H.R. 
     1997, among them the U.S. Chamber of Commerce, NELA, the 
     AARP, etc.) In any event, that is not the entire problem 
     facing victims and litigators.
       The most pernicious problem and one which causes me to 
     write to you is the combined effect of the above legislation 
     coupled with other laws of Congress, court cases and IRS 
     regulations. The effect is to cause any and all lawyers who 
     might wish to advocate for plaintiffs who have been harmed by 
     discrimination to rethink whether, in fact, they wish to 
     continue to do that work. And it places lawyers who do 
     continue to advocate at loggerheads with their clients' 
     interests.
       The law is now clear that victims of discrimination owe tax 
     payments on whatever settlement/judgment they might receive. 
     And it is clear that their attorneys owe tax payments on 
     whatever attorney fees and expenses they are awarded. 
     However, the law is also quite clear that the victims of 
     discrimination also owe taxes upon the amount of

[[Page S7164]]

     money their attorney is compensated for his/her efforts in 
     obtaining the settlement/verdict. While in some situations it 
     is possible to deduct those costs, given the Alternative 
     Minimum Tax provisions and recent Tax Court cases, it is 
     close to impossible to do so. Thus, victims of discrimination 
     may well add up with an additional tax burden in excess of 
     any sums of money actually obtained in the litigation to 
     compensate them for their injuries. This must be contrary to 
     the intent of Congress in passing civil rights legislation 
     over the past thirty years, and the views of the Supreme 
     Court in holding that attorney fees awards should be fully 
     but reasonably compensatory to the attorneys, in order to 
     facilitate attorneys in handling civil rights legislation.
       I can provide you with a real-life example which impacts an 
     Iowa citizen who successfully fought discrimination and 
     retaliation and his attorney, the undersigned, who joined in 
     that effort. Based on what we know now, both of us are 
     quite sorry we ever entered into the effort to prevent 
     discrimination and retaliation from occurring.
       Don Lyons assisted a co-worker in filing a sex 
     discrimination complaint against their employer. As a result, 
     he and the co-worker were retaliated against. We brought suit 
     on behalf of the co-worker for sex discrimination in 
     employment in the Southern District of Iowa and made a claim 
     for retaliation in violation of Title VII on behalf of both 
     Don and his co-worker. The case was litigated in the court 
     here, with the result that the sex discrimination case was 
     resolved prior to trial. However, because no settlement of 
     Don's claim was possible, his retaliation case went onto a 
     jury trial before eight jurors from the southern District of 
     Iowa.
       We put on two days of evidence before the jury and Judge 
     Wolle, with the result that Don was awarded $1.00 in nominal 
     damages (a recognition of his right to bring the claim) and 
     $150,000 in punitive damages. On post-trial motions, Judge 
     Wolle upheld the jury's verdict on liability and held that 
     there was sufficient evidence that ``defendant had an evil 
     motive and had intentionally violated federal law in 
     retaliating against Lyons because he had assisted other 
     pilots in protecting their civil rights.'' However, Judge 
     Wolle remitted the punitive damage amount to $15,000.00, 
     because he thought that would be sufficient to punish the 
     defendant. Pursuant to the attorney fee provision of the 
     civil rights law, I have petitioned the court for 
     approximately $170,000 in fees and expenses; that is based on 
     my hourly rate of $180.00 an hour (a rate much less than that 
     of lawyers in other cities, and probably much less than the 
     two defense lawyers from Chicago who tried the case). The 
     fees and expenses amount may seem high, but is the result of 
     a fair amount of contentiousness and the need to take 
     depositions in Kansas and Arizona.
       The problem for my client and for myself arises from the 
     clear tax implications of this situation. My client would 
     normally pay out of his $15,000 in punitive damages the sum 
     of $5,467.00, and that would be fine for him.
       However, if the court awards me a ``fully compensatory'' 
     fee and expenses figure of $150,000 (I am using that as an 
     example, because we have run the figures on this sum), not 
     only will I pay my taxes on this figure (gladly so), but my 
     client will also and without the ability to deduct the sum 
     due to the pernicious effect of the alternative minimum tax!


                                                                 Amount
Don's taxes of $15,000........................................$5,467.00
Don's taxes on $15,000 plus the attorney fee award of $150,00067,791.00
Difference/Additional Taxes Owed by Don for the ``privilege'' of 
  having won his retaliation case.............................58,236.00
                                                             __________