[Congressional Record Volume 149, Number 36 (Thursday, March 6, 2003)]
[Senate]
[Pages S3315-S3316]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Ms. COLLINS (for herself, Mr. Grassley, Mr. Bingaman, Mr. 
        Cochran, Mr. Daschle, Mr. Sarbanes, and Mr. Smith):
  S. 557. A bill to amend the Internal Revenue Code of 1986 to exclude 
from

[[Page S3316]]

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 2003, a bill designed to promote the fair and equitable 
settlement of civil rights claims. I am very pleased to be joined today 
by Senators Grassley, Daschle, Bingaman, Cochran, and Sarbanes.
  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 that are 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 attorneys' fees awards penalizes 
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 Augusta, ME--my State's 
capital. In one of his cases, 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 receive 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 even though they receive no monetary award. Or, in other words, 
under current law, a plaintiff can actually 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 injury 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 suffered, not on the excessive taxes 
that are now levied.
  Our bill has been endorsed by the U.S. Chamber of Commerce, AARP, the 
National Employment Lawyers Association, the No FEAR Coalition, the 
Religious Action Committee for Reform Judaism, the Society for Human 
Resource Management, and others. This bill is a ``win-win'' for civil 
rights plaintiffs and defendant businesses. I invite my colleagues to 
join in support of this common sense legislation.
                                 ______