[Congressional Record Volume 153, Number 103 (Monday, June 25, 2007)]
[Senate]
[Page S8361]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. BINGAMAN (for himself and Ms. Collins):
  S. 1689. 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 in support of the Civil Rights Tax 
Relief Act of 2007, which I joined Senator Bingaman in introducing 
today.
  The primary purpose of this bill is to continue our efforts 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 means that 
plaintiffs who succeed in proving that they have suffered employment 
discrimination or other intentional violations of their civil rights 
are taxed on the compensation they receive.
  Until a few years ago, this problem was compounded by the fact that 
attorneys' fees awarded in successful civil rights actions were treated 
as the plaintiff's taxable income, despite the fact that these fees 
were paid over to the plaintiff's attorney, who was also taxed on the 
money. Back in the 108th Congress, I joined with Senator Bingaman in 
offering legislation to correct this inequity, and I am glad to say 
that this double taxation of attorneys' fees was eliminated as part of 
the JOBS Act we passed in 2004.
  But more remains to be done. Plaintiffs who are successful in 
employment discrimination or civil rights cases often receive a lump-
sum award meant to compensate them for years of employment. 
Unfortunately, these awards are then taxed at the highest marginal tax 
rates, as if the award reflected the plaintiff's normal annual salary. 
As if that were not bad enough, successful plaintiffs can also find 
themselves subject to alternative minimum tax.
  Let me explain how our bill eliminates this unfair taxation. 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. Our 
bill also ensures that these awards do not trigger the AMT.
  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.
  This bill is a ``win-win'' for civil rights plaintiffs and defendant 
businesses. I invite my colleagues to join in support of this 
commonsense legislation.
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