UNITED STATES v. BURKE
Legal provision: Internal Revenue Code
Argument of Jeffrey P. Minear
Chief Justice Rehnquist: We'll hear argument first this morning in No. 91-42, United States v. Therese A. Burke.
Mr. Minear: Thank you, Mr. Chief Justice, and may it please the Court:
The issue in this case is whether a taxpayer must include in her gross income amounts received in settlement of a title VII wage disparity suit.
We submit the settlement award is gross income because it amounts simply to delayed payment of wages for services.
Those wages should be taxed in the same manner as if they had been paid when earned.
The facts of this case are not in dispute.
The taxpayers were female employees of the Tennessee Valley Authority.
In 1984, the TVA was sued under title VII on the theory that it had increased the salaries of employees in certain male-dominated pay schedules without providing comparable increases to employees in certain female-dominated pay schedules.
The complaint sought specific relief in the form of an order directing TVA to eliminate prospectively the pay disparity and to provide, quote, back pay to all affected female employees in an amount sufficient to eliminate discrimination.
In 1987, the plaintiffs and TVA settled the lawsuit by entering into a settlement agreement.
The taxpayers in this case shared in the settlement proceeds.
TVA made payments to them, and in accordance with the terms of the settlement agreement, withheld amounts for Social Security and Federal income taxes.
The taxpayers then filed claims for refund of the withheld taxes.
The Internal Revenue Service disallowed those claims.
The taxpayers then brought this refund suit.
They argue that the settlement payments should be excluded from gross income under section 104(a)(2) of the Internal Revenue Code, which states that gross income does not include, quote, the amount of any damages received on account of personal injuries or sickness.
The district court rejected their claim; however, the court of appeals reversed.
The majority reasoned that title VII awards constitute damages on account of personal injuries or sickness because injuries resulting from discrimination are, quote, injuries to the individual rights and dignity of the person.
Judge Wellford dissented.
He concluded that title VII awards should be included in gross income because they simply amount to a payment of wages for services.
We submit that Judge Wellford is correct.
An equitable award of back pay is compensation for services.
The Court recognized that principle in Social Security Board v. Nierotko, where it held that a back pay award under the National Labor Relations Act is subject to Social Security taxation.
As the Court stated there, surely the back pay is remuneration.
The same is true with respect to title VII back pay, which was patterned after the NLRA remedy.
Thus, the taxpayers back--
Unknown Speaker: What if the taxpayer had been wrongfully dismissed because of race or sex and then sued to get back--
Mr. Minear: --We submit the same result would follow.
Unknown Speaker: --Be payment for services?
Mr. Minear: --Yes, that's right.
Unknown Speaker: But you would not have provided any services.
Mr. Minear: That's right.
But this was the very issue that was involved in Nierotko, actually.
That was an unlawful discharge case also.
And in Nierotko, the Court held that the person remained in the service of the employee where he had been wrongfully discharged.
The Court stated that services are... that one remains to provide services even though one might not be active.
Unknown Speaker: You're playing with words, it seems to me.
Of course... I mean, you can say he remained in, quote, in the service of the employer, but did not provide any services.
Mr. Minear: Well, that's correct.
But that was the issue that this Court faced in Nierotko and decided that in fact those were wages for services.
Unknown Speaker: Well, would you give the same answer if there were a physical injury caused to an employee and the recovery is measured on the basis of lost wages?
Mr. Minear: No, we would not.
That is the very distinction we draw between personal injuries and wages for services.
That where a person is unable to perform the service, that he has been disabled, in those cases he's receiving damages by the amount of the lost wages.
Unknown Speaker: Well, how about a suit for sexual harassment?
Mr. Minear: In those cases, title VII did not provide a monetary remedy for those types of cases in the past.
Unknown Speaker: Well, under the new legislation are you going to have to face that question?
Mr. Minear: Yes, I suspect that we will face that question.
Unknown Speaker: And what's the position you would take?
Mr. Minear: I don't believe that the IRS has had an opportunity to formulate a formal position on that, but I think the same principles would be applied in this case.
We would look to whether there has been what amounts to a capital loss of some kind for the... on behalf of the employee.
If the employee, for instance, suffered emotional injury, that is a type of injury that is recognized by the Service as being within the 104(a)(2) exclusion.
Unknown Speaker: You think the Treasury regulation puts forward the same approach that you're urging us to adopt here?
Mr. Minear: Yes, that is correct.
Unknown Speaker: It doesn't read that way.
It says the phrase damages received means an amount received through prosecution of a legal suit based on tort or tort-type rights.
Mr. Minear: Yes.
And I think that that regulation is referring specifically to what we mean by the term damages received.
It's not speaking to what we mean by a personal injury.
And I think the important distinction that that regulation is making... which, by the way, appears on page 12 of our reply brief... the important distinction that that regulation is making is between a damage remedy and a remedy for equitable relief, for specific relief.
It says the term damages received means an amount received through prosecution of a legal suit or action based on tort or tort-type rights.
Unknown Speaker: Well, why isn't a suit brought, as in this case under title VII, a suit for damages based on a tort-type right?
Mr. Minear: Because instead, Your Honor, that is a suit for equitable relief, for specific relief.
What title VII provides is an equitable remedy for specific relief in the form of reinstatement and an additional award of back pay.
Unknown Speaker: Can't you get damages as a form of relief?
Mr. Minear: This... I would look to the same distinction that this Court drew in Bowen v. Massachusetts between... the term damages and the term specific relief.
Damages are provided as a monetary substitute for a loss, while specific relief is provided as the very thing to which the plaintiff is entitled.
And in fact, in Bowen, the majority opinion used the back pay award as an example of that type of specific relief where a monetary award is provided.
Now as I was saying, the taxpayers' back pay award in this case falls squarely within the Internal Revenue Code's definition of income, which expressly includes compensation for services.
And the only question then is whether some other provision of the code nevertheless removes back pay from that definition.
As a starting point, we note that this Court has repeatedly stated that exclusions from income must be express and not implied.
And this Court has repeatedly emphasized that even express exclusion should be construed with restraint in light of Congress's policy to tax comprehensively.
Now there is no express exclusion for title VII back pay awards, and we believe that the court of appears erred in construing section 104(a)(2) as providing that kind of exclusion.
Unknown Speaker: So, Mr. Minear, if Congress in enacting title VII had provided for damages for this sort of discrimination and allowed a jury trial so that Albemarle would have come out the other way, then this award would be excluded?
Mr. Minear: Not necessarily.
That only passes the first hurdle here.
The question in front must first be damages.
And it also must be received as compensation for personal injuries or sickness.
So there still would have to be a determination whether the damages were received as compensation for personal injury.
And that would be the remaining question.
And that would depend on the gravamen of the complaint.
Unknown Speaker: Mr. Minear, the phrase we're talking about here is: on account of personal injuries or sickness.
Why did the Government abandon its original interpretation of that in which personal injuries would mean physical injuries?
I mean, when you say personal injuries or sickness, it seems to me... the phrase feet or inches, you wouldn't think that feet referred to a part of the human anatomy, given the word feet as used with inches.
And when you say personal injuries or sickness, I mean, it obviously connotes to me physical injuries.
Mr. Minear: Well, I agree with you.
Unknown Speaker: And the Government used to take that position.
Mr. Minear: It took that position in 1920, I think.
Unknown Speaker: Why did it abandon that high ground and now try to argue that somehow the word personal injuries means expenditure of capital?
Mr. Minear: Well, I think the original--
Unknown Speaker: I mean, it just does not connote that, frankly.
Mr. Minear: --Yes, I agree with you, Your Honor, with regard to that point.
It becomes even stronger when one looks to the original language of the 1918 statute.
And in 1920, based on that language, the IRS took the position that personal injuries meant physical injuries.
However, that same year, this Court decided the case of Eisner v. Macomber, and that indicated, at least suggested, that income for purposes of the Sixteenth Amendment referred only to gains from labor or capital.
The IRS, looking at that definition, reconsidered this question, and it said, well, regardless of what what is now section 104(a)(2) might say, this wouldn't be income in any regard because a damage award is not a gain from labor or capital.
That is the approach that continued.
In other words, that the exclusion here just became irrelevant, based on the Service's view of the meaning of income.
That question was finally resolved in 1955, when this Court decided Glenshaw Glass, and made clear that income includes all accessions to wealth.
Nevertheless, the interpretation of personal injury somehow carried on.
And I think the best example of this was a case--
Unknown Speaker: I thought it was not until something like 1983 that the Government acquiesced in the proposition that the phrase goes beyond physical injuries.
Am I wrong about that?
Mr. Minear: --Well, actually the first case... that was the first court of appeals opinion, Roemer, the Ninth Circuit case, I think is the first court of appeals case where that was squarely decided.
It also arose in a tax court case in 1972 called Say v. Commissioner.
Now perhaps the IRS made the mistake of not pressing that argument further and continuing to draw the line between physical injuries and other types of injuries.
However, by that time there had been this accumulation of practice, you know, from the... as a result of the original Eisner decision.
And the IRS instead decided to expand slightly the definition of personal injury to include what are analogous nonphysical injuries.
And it was a limited set until the last few years.
This included only defamation or injury to in the case of emotional distress.
Unknown Speaker: Logic will out, Mr. Minear.
It might have been a limited set for a while, but logic will out.
Mr. Minear: Well, that's true and that is a difficulty we continue to struggle with.
Nevertheless, that is the position the Internal Revenue Service has taken.
I would like to go back and just clarify a few points with respect to this distinction between damages and specific relief, because I do think it's important.
And it is reflected in the D.C. Circuit's recent decision in Sparrow v. Commissioner.
Unknown Speaker: Mr. Minear, can I ask you a preliminary question before that?
Mr. Minear: Yes, Your Honor.
Unknown Speaker: The court of appeals placed heavy reliance on a decision called Threlkeld against the Commissioner, a 15 to 1 decision of the tax court.
You don't even cite that case in either your principal brief our your reply brief.
And that case said we should look at the origin of the claim rather than the results in terms of damages and the like.
Why don't you have anything to say about Threlkeld?
And what's your view of that case and the analysis in that case?
Mr. Minear: Your Honor, the Threlkeld, at its most general level, that you looked at the nature of the injury, I think is correct.
And we do distinguish between--
Unknown Speaker: You look at the nature of the injury rather than the consequences in terms of damages or back pay or results.
Isn't that right?
Mr. Minear: --Why, and it's that latter point that I have some difficulty with here, because I think that leads to a certain amount of confusion.
The question in Threlkeld, it was attempting to deal with a difficulty that had originally arisen in the Roemer tax court decision.
And in Roemer the tax court had tried to make a distinction between personal reputation and business reputation, saying that one could get an exclusion for injuries to one's personal reputation, but not to one's business reputation.
And what Threlkeld did, and I think quite correctly, was eliminate that distinction and said no, we simply look to the fact that there was an injury to one's reputation.
That's as far as we need to go.
And I think that's what Threlkeld really stands for.
Judge Wellford makes this very point in his dissenting opinion below.
But I think that it's mistaken to suddenly to exclude any consideration of what type of injury was actually suffered here, and that's how it is being used by respondents, I believe.
The injury that was actually suffered in this case was a underpayment of earnings.
The female employees were not paid as much as their male counterparts.
Unknown Speaker: Well, you can't really say that that's the only injury, can you?
Mr. Minear: Well, that was the only injury that title VII provides recompense for.
And I think that's significant, too, that the settlement award has to based on the cause of action that's allowed under title VII.
Now, title VII provided for equitable relief in the form of reinstatement and back pay sufficient to make the person's earnings whole.
The back pay award is simply part of the specific relief that is--
Unknown Speaker: So even if he was... even if he suffered great embarrassment and he worried a lot, lost a lot of weight, things like that?
Mr. Minear: --Title VII does not--
Unknown Speaker: And title VII just isn't designed to recompense--
Mr. Minear: --Until recently amended, it was not designed to compensate for that.
Now the new provisions, the Civil Rights Act of 1991, actually do provide a damage remedy.
And as I said, the distinction there will be between damages that are in fact personal injuries and those that are not.
Unknown Speaker: --So what's going to... I suppose we'll have another case up here under the new act.
Mr. Minear: Well, it's always possible that the Government will win these cases, and I think that with respect to the personal injuries aspect of this, I think the question will focus on what is the nature of the particular injury.
If there is something akin to emotional distress, for instance, it seems to me that the IRS has already provided the proper analogy.
Unknown Speaker: And up until now, the... title VII has never allowed recovery for emotional distress.
Mr. Minear: That's correct.
And I think it's also interesting to not that all of this entire matter here is a matter of rather recent origin.
For many years, there was no question that back pay awards under the NLRA were in fact included as gross income.
These cases have all arisen in the past few years, actually.
And it's been a--
Unknown Speaker: Under the new statute, Mr. Minear, is there a jury trial provided... under the new statute?
Mr. Minear: --I believe that a jury trial is provided.
That is correct.
Unknown Speaker: Would that change your position so that this would become legal and not equitable?
Mr. Minear: Well, again, I think the question here is we shouldn't allow the existence of a jury trial to determine that question but rather the nature of the cause of action that's provided.
And in the cases where you're receiving money as a substitute for loss, it seems to me that those are damages.
And again, that only answers the first half of our question.
Now, I'd like to turn to the--
Unknown Speaker: I'm sorry, but I would like to ask one further question.
You say that if it's an underpayment of wages, that's the easy case.
And then you answered Justice Scalia by saying if there was also a discharge, you'd treat it the same.
What about a refusal to hire?
Mr. Minear: --Well, in the case of a refusal to hire, it might be that there's no monetary award that title VII provides under its equitable remedies.
What it provides would be in fact a requirement the person be hired.
Unknown Speaker: Well, assume under the new statute we got a refusal.
Would you draw a different... analytically, would you draw a distinction between a refusal to hire and a discharge?
Mr. Minear: Why, I think that, again, insofar as the pay is... is what the person is receiving is compensation that they should have received--
Unknown Speaker: For work performed.
Mr. Minear: --for work performed.
Unknown Speaker: So, that doesn't cover the discharge, either.
Mr. Minear: Yes, but in the discharge cases, I said in Nierotko the Court took a rather broad view of what is service--
Unknown Speaker: He's constructively working.
Mr. Minear: --as constructive work.
It might be appropriate--
Unknown Speaker: But you couldn't say he's constructively working in he'd never been hired.
That's why I asked the next question.
Mr. Minear: --Yes.
And why... I'm not sure what our position would be on that, quite frankly.
Unknown Speaker: xxx have to be right now.
Mr. Minear: Well, that's true.
And in this case, I think it does bear emphasis that in this case the employees did continue to work for the TVA and the back pay is definitely here, wages for work that was performed.
Unknown Speaker: What all this suggests, at least, is if we're looking for bright lines, I suppose your opponent has a brighter line than you do.
Mr. Minear: But their bright line, with all respect, Your Honor, is quite far removed from what the statutory language is here, which is damages received on account of personal injury or sickness.
Unknown Speaker: Right.
Mr. Minear: Now the ordinary meaning of the term personal injuries or sickness does not embrace, as the court of appeals would have it, I think, every legally cognizable injury.
And that is the reductio ad absurdum of their position, that every injury would in fact be covered... every legally cognizable injury to an individual would be covered.
As various courts and commentators have observed, the term personal injury has a more limited meaning.
And as a result of various tax court rulings, the Internal Revenue Service has applied the term to certain analogous nonphysical injuries, primarily injury to one's reputation and injury to one's emotional well-being, that, like physical injuries, can be roughly related to a loss of human capital.
We think it's clear, however, that the taxpayers here did not receive that kind of loss.
The resulting settlement agreement here provided for specific relief in the form of certain affirmative action and also back pay.
And the monetary award... the monetary portion of that award clearly compensates wages for services.
Now, the Government's position here is not only reasonable, it also consistent with prevailing law and produces a just result.
As I noted earlier, this Court has already concluded in Nierotko that a back pay award is a payment of wages for purposes of FICA taxation.
There would be... there is no reason to depart from that rule in the case of Federal income taxation.
Additionally, the IRS has consistently treated back pay awards under other statutes, such as the Fair Labor Standards Act, as gross income.
We simply urge that a title VII back pay award be treated in the same manner.
And to hold otherwise would produce anomalous results.
If earnings received through a back pay award had been paid when earned, they certainly would have been subject to taxation.
There's no reason why the earnings should now become tax exempt simply because they are paid at a later date.
Indeed, if the court of appeals's approach were followed, the Federal Government would end up subsidizing discrimination.
An employer could engage in wage discrimination, and if sued under title VII, make up the difference in wages through a back pay award based on after tax earning, which would make the employee whole... whole.
And it could then pocket the taxes that should have been paid.
And we do not believe that Congress intended to provide that sort of tax reward or incentive for unlawful discrimination.
I would like to reserve the remainder of my time.
Thank you, Your Honor.
Unknown Speaker: Very well, Mr. Minear.
Mr. Finley, we'll hear from you.
Argument of Joseph E. Finley
Mr. Finley: Mr. Chief Justice, and may it please the Court:
I detected at the outset a really... misstatement of the question presented that has veered from what I thought we addressed in our briefs.
Counsel for the Solicitor General and for the Government talked about it as a accession to wealth or gross income case.
We all agree that it would be an accession to wealth.
This is a question of exclusion by section 104(a)(2) from taxation.
It's an exclusion case.
And to reach the exclusion case, we have to look at the statute, and that's where this case begins.
And the regulation that follows thereunder.
And the statute says in language that one may think clear until we start bouncing it around, but the statute says, excluding the amount... the amount... of any damages received on account of personal injuries.
Now, a regulation follows--
Unknown Speaker: Or sickness.
Mr. Finley: --Yes, but sickness wasn't involved in this case, and I'm trying to confine it to this case and the scope of the problem.
Now, the regulation comes.
It's the Government's regulation, not ours, a regulation which we are entitled to follow and entitled to honor because the regulation is in accord with the statutory language.
And the regulation helps to expound and expand what is excluded.
And 26 CFR 1-104-1(c) excludes the amount of any damages received on account of personal injuries.
Then it goes further to make an express definition.
The term damages received means an amount received... we're not talking about legal or equitable; it's an amount received... through prosecution of a legal suit or action.
Through prosecution of an action.
In this case, the underlying case was an action brought in court to redress the wrong of sexual discrimination.
And it says, through prosecution of a legal suit or action based upon a tort or tort-type rights.
And we suggest and argue and present that the inquiry must be focused on those terms, used by Congress, and used by the Treasury.
And the facts of this case fit exactly into the statutory language and the regulation, point by point, step by step.
Unknown Speaker: Mr. Finley, the Government says, and I think accurately, that that definition is just a definition of damages, that the... the regulation that you read.
And they're not relying for their point in this case upon the word damages, although the D.C. Circuit in a recent case did.
They are relying on the words personal injuries.
Mr. Finley: Well--
Unknown Speaker: So that definition really doesn't help you.
It's a definition of damages.
Mr. Finley: --Well, if they are relying on personal injuries, and I struggle to determine what their position really is.
In the reply brief, the Government says that we can't establish that a personal injury was involved.
Now, it seems to me the analogy may be drawn readily from this Court's ruling in Goodman v. Lukens Steel.
And this poses a hypothetical to which I don't believe the Government has an answer.
And in fact, its whole argument treats Goodman v. Lukens Steel as it never existed.
In Goodman v. Lukens Steel, there was a combined section 1981 case and a title VII case.
It was the same wrong, the same injury complained of.
The case proceeded under section 1981 through the district court and the court of appeals because obviously there was a wider, broader remedy.
Now this Court has held, and it's undisputed, that in section 1981 claims and title VII claims, the gravamen of the injury is the same, the proof required is the same, the treatment is the same.
And the bottom line is that the only difference in those statutes in application in a practical world is the actual remedy.
Now, this Court earlier said in Davis v. Passman that you must separate the wrong from the remedy.
And that's what we believe clearly, clearly the statute provides and the regulation.
Now to answer your question further, Justice Scalia, and go back to the 1981 analogy, in our particular case... let's take that.
If the taxpayers in this case had been black persons instead of females, they could have brought the same action under section 1981.
The same wrong would be complained of, the same proof would have been necessary, and the result... let's say the outcome or the settlement was based... same dollars, same everything else, except this is under section 1981.
So the question becomes if a violation of section 1981 is a personal injury, there... and it's also a part of title VII, discrimination is a personal injury.
And this Court in Goodman made a ringing affirmation that discrimination is a personal injury.
And it cannot be said otherwise.
And I can't understand the Government saying otherwise.
And so the Government has not unequivocally answered the question, was a... is a violation of title VII a personal injury.
Unknown Speaker: Well, Mr. Finley, in what context was the statement used in the case you're referring to... the discrimination is a personal injury?
Mr. Finley: In Goodman?
Unknown Speaker: Yes.
Mr. Finley: It was racial discrimination, Your Honor.
Unknown Speaker: But what was the question the Court was answering?
Mr. Finley: Well, the question obviously in the case was a statute of limitations question.
That was the--
Unknown Speaker: So they were trying to decide whether the statute of limitations would be the personal injury statute?
Mr. Finley: --That is correct.
And the Court first had to decide... if it was a personal injury, you apply the personal injury statute of limitations of the State of Pennsylvania in Goodman v. Lukens Steel.
The Court made that decision, and affirmatively stated that it was indeed a personal injury.
Unknown Speaker: Well, do you think a statement like that in a case where we're trying to find the proper statute of limitations and States categorize statutes of limitations... frequently one will be for personal... necessarily carries over body and soul into this area of the law?
Mr. Finley: Yes, sir.
My answer is clear cut and unequivocal on that.
It does because we are addressing... and we come back again to 104(a)(2), which, as the inquiry before the Court today... because it is a commission of a tort or tort-type right created by statute.
Unknown Speaker: But there you're relying on the regulation, of course.
Now the Government interprets the regulation differently than you do.
Under our cases, isn't it... isn't the Government entitled to some deference for the way it interprets the regulation?
Mr. Finley: I don't know how the Government... I don't believe it's entitled to deference.
If it departs from what the regulation states, and it's doing that in this case.
Unknown Speaker: It's saying what it thinks the regulation means.
Mr. Finley: Yes, it is saying that, but where is the support for it?
I see no support because the language is clear and unequivocal, and we follow that language that it's an amount received based upon a tort or tort-type right.
And the Court has held, and that's why the Goodman v. Lukens Steel is so important.
We come back to Davis against Passman, where the Court found that a... discrimination on the basis of gender was a violation of a personal right.
And the remedy was somewhat different.
Unknown Speaker: Can you think of any rights that are not personal, Mr. Finley?
Mr. Finley: We can think of... the right to contract--
Unknown Speaker: That is not a personal right?
Mr. Finley: --It doesn't come under the statute because it's not a tort-type right.
Unknown Speaker: Well... but you're using language from Davis against Passman, in which you say the Court said it was a personal right.
And I'm asking you isn't it rather difficult to conceive of any right that isn't personal?
What does personal right mean?
Mr. Finley: A right that inures to the person as a human being in the eyes of the law.
And the law is going to establish what that right means.
Unknown Speaker: And then what would be a right that is not personal under that definition?
Mr. Finley: Well, it might be a contract right but... because the contract right is not involved in what we are confronted with, the exclusionary language of the statute and the regulation.
Unknown Speaker: A right to contract would not be a right that inures to the person?
To whom would it inure, then?
Mr. Finley: Well, it would in that sense inure the person.
But I don't think, again, it resolves the question before us here in this case, because we are dealing... and we must come back to that over and over again, because the statute and the regulation and, whether the Government tries to interpret it differently or not, we still have a definition of an amount received through prosecution of a legal suit or action based upon a tort or tort-type claim.
And the underlying claim in this case was a claim of discrimination.
Unknown Speaker: Mr. Finley, what if... is it any more within the meaning of the statute, or any less within the meaning of the statute a damages on account of personal injuries if, instead of being discharged... wrongfully discharged by reason of sex, a plaintiff is wrongfully discharged in violation of the National Labor Relations Act?
Mr. Finley: Your Honor, I would apply the National Labor Relations Act situation and look at it to ask the question is it a tort or tort-type right.
And in that context, to answer you specifically, I think that question ought to be revisited, and we could find and hold that it is a personal injury.
Unknown Speaker: I think we could.
I think probably minimum wage, failure to pay someone a minimum wage.
That seems to me a tortious act, too.
Don't you think?
Mr. Finley: It's more nearly in the contract area, but it could be.
Unknown Speaker: How much tax money are talking here?
Do we have any idea?
Mr. Finley: In this particular case?
Unknown Speaker: Well, no.
Mr. Finley: I don't know.
Unknown Speaker: --If we recategorize all of these things as damages on account of personal injuries... I mean, all those have been excluded: minimum wage violations, NLRA violations.
You agree with that, don't you?
Mr. Finley: Sir?
Unknown Speaker: You agree with that, don't you?
Mr. Finley: That it would broaden--
Unknown Speaker: No, that these categories have been excluded?
Mr. Finley: --In past holdings and past rulings?
Unknown Speaker: Well, in NLRB cases, wrongful discharge.
Mr. Finley: The only court decision--
Unknown Speaker: They're not excluded.
They're not excluded... from taxation?
Mr. Finley: --I would not agree to that.
I would not agree to that.
Because I don't think that question's been answered as yet.
Unknown Speaker: It's been the practice, though, hasn't it?
Mr. Finley: Well, in practice, that's been the case.
And the situation here, as Mr. Minear pointed out, as I have experienced, since this case was brought, the law has been in an evolving state.
And the cases have been coming down, and there's been an examination and reexamination of the statute and the regulations, as the full tax court did just a few months ago in the Downey case... which again, the Government seems to ignore because the tax court in the Downey case in July or August of 1991, after this case was decided, reviewed the history of 104(a)(2), the purposes of it, exclusion, the place where you start the inquiry, and incidentally, concluded over and over again that the Burke case in the Sixth Circuit, our case here, was rightly decided and the basis of the tax court's treatment in the future should be these standards set by the court of appeals below.
And the tax court reversed a string of prior holdings in the Downey case.
Unknown Speaker: So the only actions you would exclude are contract actions.
Do you have any other actions that you think don't come within this principle of personal injuries?
Mr. Finley: If they can be defined as personal injuries, they meet the statutory and the regulatory language, and then the problem becomes--
Unknown Speaker: But you think contract actions don't?
Mr. Finley: --I think that's right.
Unknown Speaker: They do not.
They are not personal injuries.
Mr. Finley: They are not personal injuries.
Unknown Speaker: Okay.
Well, what about a suit for wrongful breach of... a tort suit for wrongful breach of statutes, which some State... some States have now.
Mr. Finley: Or a tort case interference with contractual relations?
Unknown Speaker: Right.
Mr. Finley: That's a tougher example, you see, because--
Unknown Speaker: Or wrongful breach of... of contract.
Some States have a tort of that, an intentional, malicious, tortious breach of contract.
Mr. Finley: --And I would go back in a comparative sense to Goodman v. Lukens Steel, even though as Chief Justice Rehnquist appropriately pointed out and we agreed, that was a statute of limitations case, but the analysis of this Court in that case because the... section 1981 dealt with contract rights, and the petitioners there, who sought to extend the limitations to 6 years for contract rights, were arguing this was basically a contract situation.
Unknown Speaker: Well, would you say that under 1981... if the recovery was under 1981 only, that there would be a personal injury, based on Goodman v. Lukens Steel?
Mr. Finley: Because of the statute, Your Honor, yes.
We go to the personal injury aspect of the statute.
Unknown Speaker: So if there's a suit for refusal to make a contract under 1981, that's a personal injury?
Mr. Finley: Yes, because it was for invidious discrimination based on race.
That's why it becomes a personal injury.
And invidious discrimination under title VII on race, just as section 1981 is based on race, and title VII goes further, and of course, sex, national origin, religion, and even to the age discrimination cases under another statute, which the Government seeks to wipe out here as well.
And it's... that is the personal nature of the injury as this Court has pointed out.
Unknown Speaker: Mr. Finley, would we have an easier time with this case if instead of focusing on fine distinctions in personal injury and fine distinctions about damages, we focused instead on the further requirement under 104... 104(2), which speaks of damages received on account of personal injuries.
Can't we say that even assuming you are correct, that this is a personal injury here, the damages were not received on account of the personal injury, simply because they bear no relationship and the inquiry in determining them bears no relationship to the personal injury which you say occurred?
In the award of the damages, it doesn't matter whether the discrimination was egregious or not.
It doesn't matter whether the person discriminated against was hurt or otherwise psychologically injured.
The only thing that matters is the amount of the wages.
And since that bears no relationship to the extent of the personal injury, why isn't the easy answer to say that the damages are not awarded on account of the injury?
Mr. Finley: Because, Your Honor, these are the consequences of the injury that the Government has focused on wrongfully.
And as this Court held in Albemarle Paper v. Moody, the purpose of the statute, of the title VII statute is to compensate and make whole the injured person.
Unknown Speaker: So you're saying the very nature of the statute focuses it solely on personal injury, and as a matter of law, we would have to say here that a back pay award is on account of the injury because that indeed is the object of the statute.
Is that it?
Mr. Finley: That is exactly what happened in this case, Your Honor.
That is correct.
It is the... we must establish, and in this case... I, as counsel for the plaintiffs in this case had to establish that there was a wrong committed by the defendant TVA, that TVA had discriminated against these employees based upon their sex.
And we were able to present proof to the district court that this was indeed so.
Unknown Speaker: But doesn't your answer suffer from the fact that under the statute, different kinds of relief could be rewarded?
I mean, there need not necessarily be a back pay award, and there could indeed be equitable relief to remedy the discrimination without the payment of a penny.
Mr. Finley: I would agree with the second part of your postulate, that there is these differences, but I don't think my case suffers from it because we are back again talking about remedies.
And we have again, and I'll move to a point which I think is important in the case, and maybe further responsive to Your Honor's question.
Unknown Speaker: Well, Mr. Finley, suppose a wrongfully discharged employee the next day got another job across the street, and making the same thing, except he wanted back his old job... it was easier.
And he got it back.
Would he get back pay?
Mr. Finley: He would not get back pay under the statute.
Unknown Speaker: And he couldn't sue for emotional distress, could he?
Mr. Finley: Not under... prior to the amendment, Your Honor is correct.
Unknown Speaker: Well--
Mr. Finley: This is a limitation of remedy.
Again, a question addressed to Congress, and Congress addressed it in 1991 after this case arose, and it addressed it in such a way--
Unknown Speaker: --Yes, but if he... if title VII allowed damages for personal injury--
Mr. Finley: --As it does right now, yes, sir.
Unknown Speaker: --Well, it doesn't.
I mean, it doesn't allow a suit for emotional distress.
Mr. Finley: Under the new statute, Your Honor--
Unknown Speaker: Well, I know, but it didn't--
Mr. Finley: --Oh, yes, Your Honor, yes, you're correct.
Unknown Speaker: --In this case it did not allow a suit for emotional distress.
Mr. Finley: That's right.
Unknown Speaker: But if... in my example, if title VII had allowed a suit for emotional distress, it wouldn't make any difference that he worked across the street and didn't lose any pay.
Mr. Finley: On that component of the injury, you're correct, Your Honor.
Now, to go back to this whole question here, and here again is where the scope of the exclusion comes in in equality of treatment.
In the ordinary personal injury torts case, the victim is recompensed for a portion of lost wages or lost earnings.
And those are clearly not subject to tax.
And using again the Lipelt case that this Court decided, an FELA case, where the employer visits an injury upon the employee, in that wrongful death case, the extension of earnings... and that's all there was, was the lost earnings this individual was deprived of by his loss of life... the court--
Unknown Speaker: But usually in that kind of case, the employee does not perform the services for which the compensation is paid.
Mr. Finley: --He did not.
That is correct.
He could not.
And even in the refusal to hire example that Your Honor had raised before, the employee doesn't perform any services.
The Government argued services he would have performed had he been properly, or she properly hired, but that becomes, again, irrelevancy of dealing with an amount received under the statute.
Unknown Speaker: Mr. Finley, what about distinguishing those cases on the ground that there the economic injury, the loss of wages is consequential to the real injury, which is a personal injury.
It's the loss of an arm, some physical injury.
And these things are consequential.
But the personal injury is not an economic injury, whereas in your case, the only real injury that's being sued for is initially an economic injury.
The gravamen of the whole complaint is not the loss of an arm; it's simply the loss of wages.
I think that's the distinction the Government is trying to make between those two cases.
Mr. Finley: Well, the gravamen of our case was a discrimination visit on the persons affected, which Congress allowed a remedy for at that time of back pay in the monetary sense.
And it still fits within the statutory definition and the regulations definition.
Unknown Speaker: Discrimination in the air is no injury.
The injury in this case was that the person hadn't been paid as much as others because of the discrimination.
So it was an economic injury to start off with.
It was not a personal injury.
Mr. Finley: That were the consequences, Your Honor.
That were the consequences.
But as this Court has held, and Chief Justice Rehnquist in the Meritor Savings case pointed this out very nicely about the emotional effects of discrimination upon a victim.
Now, Congress didn't provide a remedy for it at that time, and Congress provided a remedy of back pay, which was all we could claim in our prayer for relief.
The gravamen of the case, however, which had to be demonstrated and proved, was the wrongful discrimination of the employer.
And in our prayer for relief, we prayed for an award of attorney's fees, too, but that didn't convert this into a case for attorney's fees.
The monetary remedy we were entitled to receive at that time was limited to a back pay award.
And we settled that case.
Unknown Speaker: If you were facing a question of summary judgment on liability only, and the only thing that you supported was the claim of discrimination, you'd lose, wouldn't you?
Mr. Finley: --No, sir.
We had that very... this arose in this case.
I faced a motion for summary judgment.
Unknown Speaker: You should have lost, shouldn't you have?
Mr. Finley: Well, not with the proof I had, Your Honor, no.
Unknown Speaker: No, but in fact--
Mr. Finley: I could not have lost in that modicum of proof.
Unknown Speaker: --In fact you put in the lost wages, didn't you?
Mr. Finley: No, sir.
Unknown Speaker: You didn't?
Mr. Finley: In the motion for summary judgment, and I argued that case before the court, the lost wages were never discussed in... at all except that it was the incident thereof.
We were confronted with... on the summary judgment aspect of the case, we were confronted with a problem: did TVA commit the wrong alleged in the complaint of discrimination.
And that's what the plaintiffs had to prove and make a showing on, and which we did.
Unknown Speaker: No, but was that because they simply disputed the discrimination or because you had simply alleged discrimination as the sole basis for liability, leaving damages for another issue?
Which was it?
Because if it was the first alternative, then clearly you know, if you had any evidence of discrimination, you should have won.
If it's the second alternative, it focuses the issue in this case.
Mr. Finley: Well, to go back to the realities of this case, what happened, we... the summary judgment... the cross motions focused entirely on discrimination.
And we would have as a practice, since I think after the court ruled, if we had gone into the remedy, remedial portions.
We had a number of things to talk about, one of which was an award of back pay as remedial, which followed after the whole issue.
The gravamen of the case was resolved as to whether or not there was discrimination involving a personal injury under the statute here.
Unknown Speaker: Mr. Finley, did any men benefit from the recovery that was obtained here in the settlement?
Mr. Finley: Your Honor, they did because there were a minority, a small number of men in the salary schedule who were also wage-depressed because of what TVA had done.
Unknown Speaker: And you think as to the men that your argument still stands, that there's some personal injury recovery as to them?
Mr. Finley: In the emotional sense, no, but they were the... they were the peripheral victims.
They suffered as a result of the whole gravamen of the case.
Unknown Speaker: It just seems to me your theory doesn't apply as easily to them.
Mr. Finley: --Well, the males could not have brought the discrimination case in the first instance, but those who happened to be in the salary schedule profited.
Yes, they did.
Now, there is another factor here which I think ought to be addressed.
Employers in this country need to have the question resolved because they will be caused to expend far more monies if these proceeds are taxable, and the need to settle these cases, which Congress has specifically addressed itself to, will be greatly furthered by the fact that if these proceeds are not taxable, cases will be easier and more readily resolved.
Unknown Speaker: You mean because the plaintiff will accept a smaller award than otherwise because the plaintiff would be able to keep all the award, rather than pay part of it in tax?
Well, that really means then the Government would be subsidizing the thing in a way, doesn't it?
Mr. Finley: Well, if you want to call it to that extent, yes.
Except, once again, I go back to the statute in an argument addressed to Congress, not to this Court.
And the Government's other theory, which hasn't been discussed here today, on human capital, which a number of us have struggled with to understand, if adopted would spawn a vast scope of litigation as to what it is, what it means, where does it go.
And I hope to conclude by and wish to conclude by again referring to the basics of this case.
The facts of this case fit the statute and the regulation hand in glove, which entitles the taxpayers here to be exempt under the statute.
And as the court of appeals below quite correctly held, that when we inquire as to the personal injury, we satisfy that.
Amount received is satisfied by the regulation, the statute.
And therefore, exclusion from 104(a)(2).
And there it is.
Thank you, Your Honors.
Unknown Speaker: Thank you, Mr. Finley.
Mr. Minear, you have 10 minutes remaining.
Rebuttal of Jeffrey P. Minear
Mr. Minear: Unless there are questions, Your Honor, I have no rebuttal.
Chief Justice Rehnquist: Very well.
The case is submitted.
Argument of Speaker
Mr. Speaker: The opinions of the Court in two cases will be announced by Justice Blackmun.
Argument of Justice Blackmun
Mr. Blackmun: The first one is No. 91-42, United States against Burke.
In this case, it was a settlement of a sex discrimination case under Title VII of the 1964 Civil Rights Act.
And under that settlement, the Tennessee Valley Authority paid backpay to affected employees.
It withheld federal income taxes from that backpay.
The IRS disallowed the respondent's claim for refund of the taxes so withheld.
In a refund action, the District Court ruled that the settlement proceeds could not be excluded from gross income as, to use the words of the statute, damages received on account of personal injuries.
The Sixth Circuit, however, reversed and it held that the discrimination was a personal and tort-like injury.
In an opinion filed with the Clerk today, we reverse that judgment.
We hold that these backpay awards in settlement of Title VII claims are not excludable from gross income under Section 104(a)(2) of the Internal Revenue Code.
Justice Scalia and Justice Souter each have filed opinions concurring in the judgment, and Justice O'Connor has filed a dissenting opinion in which Justice Thomas has joined.