[Congressional Record Volume 147, Number 70 (Monday, May 21, 2001)]
[Senate]
[Page S5273]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Ms. COLLINS (for herself, Mr. Bingaman, Mr. Grassley, Mr. 
        Daschle, Mr. Jeffords, Mr. Sarbanes, Mr. Harkin, Mr. Corzine, 
        and Mr. Leahy):
  S. 917. 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 frontpay awards received on account of such claims, and for 
other purposes; to the Committee on Finance.
  Ms. COLLINS. Mr. President, I rise to introduce the Civil Rights Tax 
Relief Act of 2001, a bill designed to promote the fair and equitable 
settlement of civil rights claims. I am very pleased to be joined today 
by Senators Bingaman, Grassley, Daschle, Jeffords, Sarbanes, Harkin, 
Corzine, and Leahy.
  The primary purpose of this bill is to remedy an unintended 
consequence of the Small Business Job Protection Act of 1996, which 
made damage awards not based on ``physical injuries or physical 
sickness'' part of a plaintiff's taxable income. Because most acts of 
employment discrimination and civil rights violations do not cause 
physical injuries, this provision has had a direct and negative impact 
on plaintiffs who successfully prove that they have been subjected to 
intentional employment discrimination or other intentional violations 
of their civil rights. The problem is compounded by the fact that 
plaintiffs are now taxed on the entirety of their settlements or damage 
awards in civil rights cases, despite the fact that a portion of a 
settlement or award must be paid to the plaintiff's attorney, who in 
turn is taxed on the same funds! This double taxation of awards of 
attorneys' fees serves to penalize Americans who win their civil rights 
cases.
  I would like to share one example of how individuals can be harmed by 
the current taxation scheme, and even discouraged from challenging 
workplace discrimination. The example was brought to my attention by 
David Webbert, an attorney who practices in Maine's capitol, Augusta. 
In the case, David represented a person who successfully challenged a 
business' policy of discriminating against persons with a particular 
type of disability. As a result of the case, the discriminatory policy 
was declared illegal and was ended. Although the plaintiff did not seek 
any monetary damages in the case, the law did provide for payment of 
attorney's fees, which were paid by the defendant's insurance company. 
Because of the current law's double taxation of attorney's fees, they 
were taxable to the plaintiff in this case, despite the fact that they 
were also taxable to the attorney. In short, plaintiffs in civil rights 
cases like this could have to pay taxes despite receiving no monetary 
award. Or, in other words, under current law, a plaintiff can be 
penalized financially for bringing a meritorious case against a 
company's discriminatory policies.
  Our bill would eliminate the unfair taxation of civil rights victims' 
settlements and court awards; taxation that adds insult to a civil 
rights victim's injuries and serves as a barrier to the just settlement 
of civil rights claims.
  Our bill would change the taxation of awards received by individuals 
that result from judgments in or settlements of employment 
discrimination cases. First, the bill excludes from gross income 
amounts awarded other than for punitive damages and compensation 
attributable to services that were to be performed, known as 
``backpay'', or that would have been performed but for a claimed 
violation of law by the employer, known as ``frontpay''. Second, award 
amounts for frontpay or backpay would be included in income, but would 
be eligible for income averaging according to the time period covered 
by the award. This correction would allow individuals to pay taxes at 
the same marginal rates that would have applied to them had they not 
suffered discrimination. Third, the bill would change the tax code so 
that people who bring civil rights cases are not taxed on the portion 
of any award paid as fees to their attorney. This provision would 
eliminate the double-taxation of such fees, which would still be 
taxable income to the attorney.
  The Civil Rights Tax Relief Act would encourage the fair settlement 
of costly and protracted litigation of employment discrimination 
claims. Our legislation would allow both plaintiffs and defendants to 
settle claims based on the damages, not on excessive taxes that are now 
levied.
  Our bill has been endorsed by the U.S. Chamber of Commerce, the 
Leadership Conference on Civil Rights, the American Small Business 
Alliance, AARP, the National Whistleblower Center, the National 
Employment Lawyers Association, numerous state and local bar 
associations and sections, including the Maine State Bar Association, 
Labor and Employment Section, and others. This bill is a ``win-win'' 
for civil rights plaintiffs and defendant businesses. We invite our 
colleagues to join with us in support of this common sense legislation.
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