COMMISSIONER OF INTERNAL REVENUE v. SCHLEIER
Legal provision: Internal Revenue Code
Argument of Kent L. Jones
Chief Justice Rehnquist: We'll hear argument first this morning in Number 94 500, Commissioner of Internal Revenue v. Erich Schleier, and Helen B. Schleier.
Mr. Jones: Mr. Chief Justice, and may it please the Court:
Under section 104(a)(2) of the Internal Revenue Code, damages received on account of personal injury or sickness are excluded from tax.
This case concerns whether back wages and liquidated damages awarded under the Age Discrimination and Employment Act are excluded from tax under this statute.
A closely analogous question was presented to the Court just three terms ago in United States v. Burke.
That case involved application of section 104(a)(2) to a back wage award on a sex discrimination claim.
As the court concluded in Burke, although employment discrimination obviously may affect a personal interest, the statutory back wages remedy involved in that case compensated only the employee's economic loss.
It provided no compensation for the personal components of the employee's injury, such as pain and suffering and emotional distress.
What the court concluded in Burke was that a statutory remedy that focuses in this manner on the economic rather than the personal components of the employee's injury does not yield damages on account of personal injury within the meaning of section 104(a)(2).
Now, the analysis applied by this Court in Burke is also applicable to the present case.
Under the ADEA, there are two types of money recoveries, back wages of the type that this Court concluded were not excluded from income in Burke, and liquidated damages in an amount equal to the back wages award but only in cases involving wilful violations of the act.
Pain and suffering, emotional distress, and other similar personal components of the employee's injury are not compensable or even admissible in an ADA suit.
Unknown Speaker: But you do have a tort like remedy in the sense that you have in effect punitive damages, and that's tort, that's not contract.
Mr. Jones: The tort like remedy is to be a tort like remedy for a personal injury.
In deciding what was a tort like remedy in Burke, the Court focused on the absence of any remedy for the personal components, pain and suffering.
The Court also mentioned jury trials and punitive damages, but those are very weak indicators of whether the underlying claim is a tort like claim for a personal injury.
Unknown Speaker: But they get us... they get us outside the simple ambit of Burke, though.
Mr. Jones: No, I don't think so.
Actually, Justice Souter, your concurring opinion in Burke stated what we believe is the correct interpretation.
Unknown Speaker: That was not the majority opinion.
Mr. Jones: No, you state in your concurring opinion--
Unknown Speaker: I thought it was very good, but--
Mr. Jones: --What I'm trying to say is that in your concurring opinion you said that the majority holds that what determines a tort like claim is whether... is solely whether the claim remedies the personal components of the employee's loss, and we think that's the correct interpretation of Burke.
As I was saying, punitive damages can be awarded even in cases involving economic torts, but the indicator of whether it's a tort for a personal injury is whether it provides compensation for the personal elements of the injury.
This is a common application of a very basic principle of the tax law, which is that because exclusions from income are to be narrowly interpreted, the... in determining whether the transaction fits within the exclusion, you have to determine whether it not only meets the form, but meets the substance of what the statute's designed to protect, and it's in that respect that the tort like remedy has to remedy the personal component of the injury because if it only remedies the economic component, then it may in form look like a personal injury, but in substance it's just an economic award and should be taxed just like all other economic awards.
Unknown Speaker: Mr. Jones, is it not the case that age discrimination claims are sometimes joined with title VII claims?
For example, sex discrimination claims?
Mr. Jones: It may be that there are independently violations of those two separate statutes, but there's no--
Unknown Speaker: But my question is, if you can bring both claims, as I understand you can, and this will cover settlements as well as litigated cases, then can't the parties manipulate themselves in and out of tax consequences by either putting the damages under title VII in their settlement papers or under the age discrimination act?
Mr. Jones: --Here again, you run into the resistance of the Commissioner to mere form as opposed to substance.
There is an ample body of case law addressing exactly what you're describing.
The Secretary, or the Commissioner, his delegate, looks to the substance of what the claims were in making the allocation.
Now, it is true that the allocation made by the parties is sort of, if you will, ordinarily respected, but if there's evidence of what you described as manipulation, certainly the Commissioner would reallocate the award and make a deficiency based upon what he... what she understands to be the substance of the party's claims.
Unknown Speaker: How are Equal Pay Act cases treated in this regime that the Commissioner is now administering?
Mr. Jones: I have to admit that's a very difficult question for me because I'm not 100 percent confident on the remedial scheme of the Equal Pay Act.
I think... well, let me assume that it's like the Fair Labor Standards Act.
I know that like the ADA it refers to some of the remedies under the Fair Labor Standards Act, but if it were like the Fair Labor Standards Act, where you had liquidated damages that were automatically awarded as additional compensation, rather than as, under this statute as a... only for wilful violations, even so, that compensation would not be compensation for the personal elements of the employee's loss in the Commissioner's view.
It's an economic compensation.
It was... as this Court described in the Brooklyn Savings case, it was compensation for delay in payment of the economic damages.
Unknown Speaker: But there's a case where there would be a total overlap.
An equal pay violation would always be a title VII violation, would it not?
Mr. Jones: I'm sorry, I really can't answer that question.
I'm just... I'm not sufficiently familiar with the scheme, the remedies, or even of the substance of the Equal Pay Act to help on that.
Unknown Speaker: Well, my concern is that you take this panoply of antidiscrimination laws, title VII, the Equal Pay Act, the age discrimination act, the disabilities act, and they all seem to be remedying the same type of wrong, yet in some cases the award will be excludable and in other cases they will not, and what sense does that make?
Mr. Jones: Well, it makes sense in respecting the distinctions that Congress drew between those statutory schemes.
We have to... the Commissioner has to be concerned with the application of this revenue statute to all types of claims, and the distinction that we've drawn, and that the Court drew in Burke, between statutes to just compensate for economic loss and statutes that compensate in addition for personal loss is important in applying the statute to all types of remedies.
Now, in the area of employment discrimination, Congress has drawn certain distinctions between different types of remedies.
We're simply respecting the distinctions that Congress drew, just as this Court did in Burke.
In Burke the Court said that a title VII recovery, which at that time compensated only for economic losses and not for personal losses, was not excluded, so I believe that the question that you're asking was really anticipated or was indeed the subject of Burke.
That's what the Court concluded in Burke.
Unknown Speaker: And even if we take title VII itself, and now in the post... was that 1991?
Mr. Jones: 1991.
Unknown Speaker: Even two parts of title VII, I believe your position is that if it's intent discrimination then it's excludable, but if it's impact, then it's not excludable, and those two are often pled in the alternative.
Mr. Jones: Certainly.
Unknown Speaker: I think it's an intent case, but if I don't make it on that, then it's an impact case.
Mr. Jones: It would be inconsistent with Burke to regard the disparate impact case which provides only for back wages to be excluded from income.
What happened in 1991 was that Congress provided additional remedies for the intentional discrimination case, the compensatory damages, including compensation for these personal components of loss.
In doing so, the Court... I'm sorry, Congress identified that claim as in substance as well as in form a remedy for personal injuries.
For disparate impact cases, it provides only an economic remedy, just as it does under the ADEA, so in substance what Congress did was leave that as an economic recovery.
Unknown Speaker: So but you're largely, then, leaving it, at least as far as settlement is concerned, up to the parties when you have, it could be one or could be the other, and good faith you could plead one or the other, but for settlement purposes you'll pick the one with the advantageous tax consequences.
Mr. Jones: As I have already explained, the Service's only tool in that situation is to enforce what it believes to be the substance of the party's recoveries.
Sometimes you can tell.
Sometimes it's relatively visible that there's been a contrivance, but if there hasn't been a contrivance, I suppose what that would suggest is that the remedy in fact was for the personal component of the loss, if both were available.
Now, if I could get to this case, the courts below agreed with the framework of analysis that I've described.
They differed only in a conclusion that the liquidated damages component of the age discrimination act recovery was in a... was an indirect, implied form of compensation for the personal component of the employee's loss, but that conclusion is not correct.
In TWA v. Thurston, the Court explained that ADA liquidated damages are a double damages device designed to punish and to deter wilful violations of the act.
The Court explained that the liquidated damages for wilful violations of the ADA are a direct substitute for the criminal sanctions for wilful violations of the Fair Labor Standard Act, from which the ADA remedies were largely drawn.
So the ADA liquidated damages remedy is not an automatic award given as additional compensation in each case, as it was under the pre 1946 provisions of the Fair Labor Standards Act that were involved in the Court's decisions in Brooklyn Savings and Overnight Motor.
And in Thurston, in distinguishing those older FLSA cases, the Court specifically pointed out that liquidated damages for wilful violations are a sanctioned... are a substitute for criminal sanctions and are punitive in nature.
Now, the Seventh Circuit in Downey added something very useful on this topic.
What they pointed out was, even if you could regard liquidated damages for wilful violations as somehow compensatory rather than punitive in nature, they clearly are compensation for the personal components of the employee's loss.
The availability and amount of liquidated damages under the ADEA has no bearing whatever on the existence or amount of the personal component of the employee's loss.
ADA liquidated damages are not available on account of the underlying injury.
They're available on account of the employer's improper state of mind, his wilful misconduct, and when they're awarded the amount of the recovery is limited solely by the economic loss of the employee.
The personal components of that loss are given no consideration.
Unknown Speaker: In the law of torts generally, in the case law on torts and in the treatises, do we often refer to liquidated damages?
I always think of that as a contract concept.
Mr. Jones: Well, liquidated damages I think came out of contracts, but I think that what we have to... what... Lorillard v. Pons is helpful in understanding what's going on here.
In Lorillard v. Pons, the Court pointed out that when FLSA remedies were drawn into the ADEA, to the extent that they were drawn in without change they should be given a similar interpretation, but to the extent they were drawn in with the change, they should be given a different interpretation, and in Lorillard v. Pons, the Court specifically pointed out that liquidated damages under the FLSA had meant something, but now it's something different under the ADEA.
I think that what happened was that the term FLSA, but the concept was changed into a substitute for the criminal remedy.
Unknown Speaker: Liquidated damages in traditional contract law often means a sum that is awarded because the actual damages would be very difficult to assess, doesn't it?
Mr. Jones: --That's correct.
I think as an ordinary contract remedy that would be the concept that it addresses, but as I pointed out, when it came along into the ADEA, it really changed its nature, and as the Court said in Thurston, it became punitive in nature and a substitute for criminal sanctions.
Unknown Speaker: Mr. Jones, as you know, I didn't... in Burke did not think that your regulation making the line, the tort like line was within the statute, but we held that it was.
You've given two reasons for saying that this is not tort like.
One is that it's only on the intentional violation that these damages are awarded, but some torts require wilfulness as well.
The tort of assault, for example.
You're entitled to damages from that, but it's a purely wilful tort.
If you do not show wilfulness, you do not recover.
Mr. Jones: Well, the point that we're... the distinction I'm trying to make when I talk about wilful is whether the resulting award is compensation for the underlying injury or compensation... or rather, not compensation, but punishment for the employer's misconduct.
Unknown Speaker: Well, you could say the same about assault.
I don't know whether you're punishing the injury or punishing the bad intent.
They both have to be there, and it's the same here.
Mr. Jones: I think the difference is that when the statute refers to injury, I think it's in the legal... context of the legal injury.
In an assault, the legal injury isn't just the harm, it's the occurrence of the conditions that give rise to the action.
Punitive damages are not based upon the legal injury to the defendant, they're based on punishment of the improper state of mind of the defendant.
Unknown Speaker: These aren't punitive damages.
They're liquidated damages, which as the Chief just suggested measure a given in lieu... because damages are hard to measure, not punishment.
Mr. Jones: --Sometimes, but I think what I was trying to point out is it's reasonably clear that in dragging this term along into the ADEA it wasn't describing the contractual historical notion of liquidated damages.
That's exactly what the Court held in Thurston, indeed, that this was a punitive sanction designed to deter and punish.
It changed its nature as it moved along, but as the Seventh Circuit explained, whether you regard it as compensation or as punishment, it doesn't compensate for the personal components of the loss.
It's like Burke.
It doesn't have the form or the substance of compensation for the personal components of the employee--
Unknown Speaker: But what about a State tort statute that says, henceforward for certain types of torts... let's say torts by ski resorts.
Some Western States have limited their tort laws in order to enable ski resorts not to be sued out of existence.
Suppose a State says that henceforward negligence recoveries against ski resorts cannot include any pain and suffering component.
You can get compensated for your economic loss from... now, does that become a nontort?
Mr. Jones: --It becomes... it... that's a question that I think the Commissioner would answer it becomes a nontort like remedy for a personal injury.
Unknown Speaker: All right, but that's not what I would consider... I mean, I don't know what we... what you meant by tort like.
You meant the... I mean the I--
Mr. Jones: That's right, it is--
Unknown Speaker: --not you personally, Mr. Jones--
Mr. Jones: --I think--
Unknown Speaker: --but the IRS--
Mr. Jones: --Yes.
Unknown Speaker: --invented this tort like thing, but I would not consider the touchstone of tort like to be whether you are entitled to pain and suffering damages.
Mr. Jones: Well, again, you have to focus on just not tort like, but the context of this is tort like remedy for a personal injury.
If we unleash the word tort like from the context of personal injury, then we include it, I suppose, perhaps in antitrust remedies, perhaps securities laws, anything that's not based on contract.
What the regulation does is it directs the distinction to be made between whether the statute is just providing an economic remedy or is providing a remedy for the personal components of the loss.
There are two other points that I'd like to briefly make.
Unknown Speaker: May I take it that the Commissioner then, despite Justice Scalia's opinion, had no occasion to rethink whether it should maintain this tort or tort type rights regulation?
I mean, if you... just the words of the statute, personal injuries or sickness, have been expanded in that regulation, but that is the Commission's position, that tort or tort like rights is the regime, right?
Mr. Jones: In two rulings issued by the Service both before and after Burke, the agency has concluded that a statutory remedy that provides simply back wages and liquidated damages in an equal amount and that does not, like an ordinary tort, provide compensation for personal components of the loss, is not excluded from income under the regulation.
It is not a tort like remedy because it lacks that element of the personal component of loss.
Unknown Speaker: But is it not true that even if it were not a tort like remedy, if it's a remedy for personal injuries, you still get the exclusion.
Say it's Workman's Compensation, or something like that.
Mr. Jones: Workman's Compensation comes in directly under a different part of 104(a), and in fact you don't have to--
Unknown Speaker: What about an insurance recovery, say, on account of--
Mr. Jones: --Insurance recovery... a mere accident comes in under 104(a)(3).
Unknown Speaker: --So it doesn't have to be a tort, is what I'm trying to--
Mr. Jones: Under 104(a)(2) it has to be damages on account of personal injury, which the Service interpreted to require there to be a tort or tort like compensation or the personal injury, so it's easy to overrun the various components of the statute.
Here we're just talking about the one, and in deciding whether this kind of recovery has both the form and the substance of a recovery on account of personal injuries, the Service has focused on whether it provides just an economic compensation like any other economic recovery, or does something more.
Now, the Service's interpretation has been... is a reasonable one.
It's consistent with Burke.
Indeed, it adopts Burke.
As the Court said in National Mufflers Dealers, it's important to give deference to the agency's interpretation to ensure that in these areas--
Unknown Speaker: --It's--
Mr. Jones: --of limitless factual variation like cases are treated alike.
Unknown Speaker: --The... you put your finger on just the part that's bothering me, that I don't understand this tort like notion.
What's wrong with saying sure the ski resort is a tort?
Now, you'd have slander of an accountant.
That's a tort, even though there are no damages other than economic damages.
But you also say, why do we have to bother... say everything's a tort.
Antitrust is a tort, if it's not contract.
Still, the damages have to be on account of personal injury.
Mr. Jones: Yes.
Unknown Speaker: So you argued both things, so my question really is, isn't this effort to say is it really a tort or is it really something else, just a waste of time?
Mr. Jones: It's not so much a waste of time as I will concede that it is... it tends to create confusion.
Unknown Speaker: So why not say, forget IRS reg to the contrary notwithstanding, forget whether characteristically it's called under ancient history in Blackstone or something tort, or has some other name.
Call it a tort.
Just look to see whether the damages are on account of personal injury.
I'm not saying I agree with what I've just said.
Mr. Jones: I understand.
Unknown Speaker: I just want to get your reaction.
Mr. Jones: Well, my reaction to that is that the Service since 1960 has applied this regulation to pursue the goal that you've described.
Now, it could be that it wasn't necessary for that purpose, but it was adopted for that purpose, and it's been interpreted in that fashion.
It seems to add a... it adds one element of direction to the inquiry, and that is whether the recovery under a tort like model includes compensation for things like pain and suffering and emotional distress, which are tort like concepts.
The current proliferation of conflicting decisions among the courts of appeals really provides a compelling justification for deference to the agency's interpretations, because currently, instead of deferring to the agency's rulings, the courts are independently struggling to determine what is a tort like remedy.
Unknown Speaker: If, in fact, the remedy in a title 7 case, let's say, is just back pay and nothing further is awarded, it's still excludable under the current position of the service, is it not?
Mr. Jones: If it's a title VII remedy, that for a--
Unknown Speaker: But did you--
Mr. Jones: --portion of title VII it provides additional compensation, then it qualifies as a tort like remedy.
Unknown Speaker: --Even though, in fact, the jury awards only back pay.
Mr. Jones: Only back pay, and I think I can explain that, but it's complicated.
In evaluating the loss involved in a personal injury, the award of the lost stream of income is a relevant indicator of what was lost, of the value of what was lost, and so we can't ignore, the Service can't ignore--
Unknown Speaker: You're talking in the traditional tort--
Mr. Jones: --I'm talking--
Unknown Speaker: --the personal injury type tort--
Mr. Jones: --I'm talking in the traditional sense.
Unknown Speaker: --but here you've got the exact same thing that you have in Burke, except now the statute says, in addition to back pay... we're not measuring the losses if we were talking about personal injury automobile accident, it's straight back pay.
Mr. Jones: No.
It's straight back pay less whatever earnings you made in the interim.
It's sort of like the lost flow of income.
Unknown Speaker: Mr. Jones, what do you do about... remember my ski resort example.
Mr. Jones: Yes.
Unknown Speaker: Which you said isn't a tort because there's no... suppose someone's injured under such a statute and is not killed but is injured to such a degree that the person becomes ill and cannot go to work.
That comes under this provision, though, doesn't it, because it's personal injury or sickness.
Sickness is okay.
If the only damages you get are for your illness, it's okay, but if it's a personal injury, somehow it has to be tort like.
That's a very strange result, isn't it?
Mr. Jones: That sounds correct, and I also want to emphasize--
Unknown Speaker: It sounds correct that it's strange, or it sounds--
Mr. Jones: --No, it sounds correct that your literal interpretation of the statute makes some sense, but what I want to emphasize is that the hypothetical that you've postulated doesn't really have enough information in it for me to feel like I can offer a firm view of how the Service would react to it.
I think that there's a lot of slippage in the way you've described it.
Unknown Speaker: --I cannot imagine why any interpretation which applies a different test when the person just gets sick and is out of work for that reason and another test where the person loses the job by reason of the same tort, I just... that seems to me weird.
Mr. Jones: There's one other point that I just have to talk about briefly, because it's a very important point to the Commissioner, and that is that liquidated damages should be excluded from income for an additional reason, which is that their award only for wilful violations is analogous to punitive damages and private fines.
In Commissioner v. Glenshaw Glass, the Court concluded that damages on account of personal injury are by definition compensatory only.
Chief Justice Warren stated for the Court in Glenshaw Glass that punitive damages are not akin to a return of capital, which was the original justification for the statute, and that they do not represent compensation on account of personal injuries.
These statutes are of the type that the Court has traditionally said are to be narrowly construed.
As we've described in our brief, consistent with the text, the structure and the history of the statute, it should be interpreted only to exclude compensation on account of income, on account of injuries, and should not be interpreted to exclude punitive awards made on account of the employer's or the defendant's improper state of mind.
I would like to reserve the balance of my time for rebuttal.
Unknown Speaker: Very well, Mr. Jones.
Argument of Thomas F. Joyce
Mr. Joyce: Mr. Chief Justice, and may it please the Court:
One of the central problems of this case was identified in Justice Ginsburg's questioning with regard to the 1991 civil rights amendments and the statutes that emerged from that legislation.
In fact, this case presents the issue what sense does it make to treat plaintiffs under the ADEA differently from plaintiffs under other similar Federal antidiscrimination statutes?
As I said, the statutes that emerged from that legislation are a unified scheme embodying congressional policy against discrimination, against racial, sexual, disabilities discrimination, as well as against age discrimination.
The fundamental principal of a tax system that similarly situated taxpayers should be taxed similarly--
Unknown Speaker: Burke was a title VII claim, wasn't it, or a pre 1991 title VII?
Mr. Joyce: --It was, Mr. Chief Justice.
Unknown Speaker: And you're not quarreling with that decision, I take it?
Mr. Joyce: Not at all.
In fact, we have relied on Burke in all of the lower courts.
The fundamental principle that similarly situated taxpayers should be taxed similarly finds direct application in the post 1991 Federal antidiscrimination scheme.
If a cluster of laws enacted by Congress are now being interpreted by the Internal Revenue Service to allow for tax free damages, as they are in Revenue Ruling 93 88, what sense does it make to take one element out of that cluster which Congress and I think an objective observer would regard as similar and treat it differently.
Unknown Speaker: Oh, but Congress treats it... the statutes are not fungible.
The remedies under this statute are different from the remedies under other antidiscrimination statutes.
Mr. Joyce: They are different.
Unknown Speaker: That's Congress' decision, not ours.
Mr. Joyce: They are different, Justice Stevens, but the remedies... and I emphasize the remedies, because Burke did speak in terms of remedial schemes.
The remedies of the ADEA are much more similar to the remedies under post 1991 title VII and the disabilities act than any of those laws' remedies are to the paradigms of unlimited State tort liability.
Unknown Speaker: Well, can you get... you can get punitive damages under title VII as amended, can't you?
Mr. Joyce: Yes, you can, Your Honor.
Unknown Speaker: Unlimited, and you can't get those here.
Mr. Joyce: If I may correct you, Your Honor, punitive damages as well as pain and suffering under post 1991 law are kept.
One can obtain a maximum under any circumstances of 300,000.
Unknown Speaker: Yes, but that... you can get 300,000 if your actual damages are only 20.
Mr. Joyce: That is correct, Your Honor.
Unknown Speaker: Whereas you can't do that under this statute.
Mr. Joyce: That is true, Your Honor.
Unknown Speaker: So the statutes are not all exactly alike.
Mr. Joyce: I--
Unknown Speaker: That's all I'm suggesting.
Congress has got a bunch of different schemes, and I think we have to look at each one separately.
Mr. Joyce: --I agree with Your Honor that they are not alike, just as title VII's remedial scheme is not exactly the same as the disabilities act.
Unknown Speaker: Well, maybe the problem is not the Internal Revenue Code or the IRS.
Maybe you should reformulate your principle that persons similarly injured should be compensated similarly.
That seems a reasonable proposition to me, and maybe that's the source of the difficulty.
Mr. Joyce: Well--
Unknown Speaker: Congress has simply provided an irrational differential in compensation, but if that produces an irrational differential in tax law, the problem is with the origin of the relief.
Mr. Joyce: --Your Honor, we don't feel that there is an irrational difference between the ADEA and title VII, or the disabilities act.
As I said, those three statutes provide for a much more similar remedial scheme.
As an example, one can easily imagine a plaintiff under the ADEA who has a large lost earnings damage and who, upon a demonstration of wilful misconduct, will receive far in excess of a plaintiff with similar lost earnings under title VII, or the disabilities act.
That illustrates that these remedial... that the range of damages in these three statutes are roughly comparable, and in fact Mr. Schleier's damages, his liquidated damages, fall somewhere in the mid range between the minimum of 50,000 required in some circumstances under title VII and the absolute maximum of 300,000.
In other words, one could imagine a person with lost earnings under the ADEA in excess of 300,000.
If that person shows wilful misconduct, that persona will receive more than 300,000 in liquidated damages.
Unknown Speaker: Yes, but there's another difference that keeps running through my mind.
The nature of the discrimination is somewhat different.
Racial discrimination, under constitutional principles, we look at very harshly, gender discrimination somewhere in between, and age discrimination, if there's any rational basis for it, it's okay.
It's not... it doesn't have the same insult associated with it as these other forms of discrimination do, so it's less of a tort type kind of discrimination.
Mr. Joyce: Your Honor, I'm in a difficult position to say whether a plaintiff who is a victim of age discrimination feels less hurt than other plaintiffs.
I recognize that there is a constitutional prohibition on age discrimination, nor is there one on gender discrimination.
However, Congress and this Court in numerous decisions, such as EEOC v. Wyoming, Western Airlines v. Criswell, has recognized the dimension of personal injury in the age discrimination statute, and that much is clear.
There is a personal injury here.
The law could not produce an award without it.
The Internal Revenue Service concedes as much in this case.
There is an injury in this type of case.
Unknown Speaker: The disabilities act comes under, is under the title VII pattern rather than the age discrimination pattern, does it not, the Americans With Disabilities Act?
Mr. Joyce: Your Honor, it is probably closer to the title VII pattern.
It is not identical, but it is much more similar to title VII.
Unknown Speaker: But it has a broader panoply of remedies than the age discrimination act.
Mr. Joyce: Broader, Your Honor, yes.
Perhaps not necessarily deeper, but it, like the remedies under the title VII, permits for a separate count of pain and suffering and a separate count of punitive damages.
Unknown Speaker: To the extent that the core remedy under the age discrimination act is making up for lost wages, why should that escape income tax?
Mr. Joyce: Your Honor, the reason for that is the reason which I think has ultimately been recognized by the Internal Revenue Service itself in Revenue Ruling 93 88.
Once you have a tort or a tort like cause of action, as the regulations state, once that occurs, any damages, as the statute says, are excludable, and the IRS now explicitly applies that principle to lost earnings or back pay under title VII, the disabilities act, et cetera.
The mere fact that the damages are measured by the earnings the tort victim would have received does not prevent the exemption under section 104(a)(2).
Unknown Speaker: Well, the statute doesn't talk about tort like injuries, does it?
Mr. Joyce: No, Your Honor.
The statute talks about personal injuries.
Unknown Speaker: Personal injuries.
Mr. Joyce: The regulations define that to mean an action prosecuted involving tort or tort type rights.
Unknown Speaker: Well, certainly if you just look at the term personal injuries, you think of it, you know, in terms of the sort of thing that comes as a result of, say, a typical automobile accident... you break your arm, you know, you can't walk right afterwards... not the sort of damages that you're talking about.
Mr. Joyce: Your Honor, historically it is true that personal injuries have emerged from the tort law, and many things that we would recognize as torts or tort like now did not exist, or would not have been recognized as causes of action in 1919 when the statute was enacted.
Unknown Speaker: Yes, but as I say, the statute doesn't say tort like.
Mr. Joyce: That is correct, Your Honor.
Unknown Speaker: The statute says... so I don't know that it's necessarily correct to say that anything you call tort like is a personal injury under the statute.
The Internal Revenue Service has said that, and we may well choose to follow their regulation, but it certainly doesn't inexorably follow from the statute.
Mr. Joyce: We actually agree with that, Your Honor, because we believe the Court in Burke emphasized not only must there be a tort like character in the law, there has to be a personal injury.
If there's no personal injury, business tort might qualify, and that's clearly beyond the reach of this exemption.
There must be, if you like, a two phase test, or a two step test.
There must be a personal injury.
Now, what distinguishes a narrow class of discrimination laws from certain other causes of action is that Congress has identified by law certain injuries that are deemed to occur when an act of intentional discrimination occurs.
A person is... a person's intangible security is invaded with respect to a fundamental feature of his or her identity, and that's what happens in unlawful racial, gender, age discrimination.
Unknown Speaker: Well, what about the tort of malicious interference with contractual relations?
Mr. Joyce: Yes, Your Honor.
That tort, which is--
Unknown Speaker: That really is economic, isn't it, entirely?
Mr. Joyce: --That is correct, Your Honor, and that tort is not necessarily within the reach of this exemption.
If one business sues another business citing that tort, there may be no personal injury.
Unknown Speaker: Well, what if I'm a defendant in an action like that, or a plaintiff in an action, and you know, I'm not a company, I'm simply an individual.
I certainly sustain some sort of injury.
Mr. Joyce: You may very well have, but I question under your hypothetical whether it is a personal injury.
If it is, then maybe we have something to apply here, but if not, the statute cannot be invoked.
Unknown Speaker: Why isn't it?
It interferes with my right to contract, right?
Mr. Joyce: A right to contract is--
Unknown Speaker: Is that any less personal than a right to be employed regardless of my age, or to be employed regardless of my sex, or--
Mr. Joyce: --Well, Your Honor, I think what you're getting at may be that the statute uses the term personal injury.
Personal injury both now and historically has been something of a term of art.
It does not--
Unknown Speaker: --Well, I think so, but we've abandoned that, and in fact it doesn't just say personal injury, it says personal injury or sickness, but we've abandoned that.
Mr. Joyce: --Yes, Your Honor.
Unknown Speaker: We've said it means any... you know.
I mean, I would have thought it meant what the Chief says, suggests.
Mr. Joyce: And this is where the Threlkeld case, for example--
Unknown Speaker: Yes.
Mr. Joyce: --provides a guide.
In that case, which was a lower court opinion, obviously, cited by this Court in Burke, Threlkeld emphasized there must be some type of fundamental injury to the human identity.
Unknown Speaker: To the human identity.
Mr. Joyce: Yes, Your Honor, something that rises to the level of an intangible or a physical invasio of security.
Unknown Speaker: That's too profound for me.
I'm not sure I can cope with that.
Can you get that kind of injury when you fire everybody over 70 years old, that's that kind of injury?
What on earth does that mean?
Mr. Joyce: Your Honors have asked two questions.
Over 70 would not be within the reach of the age statute.
Unknown Speaker: Say over 60.
Mr. Joyce: Okay.
That may very well be, Your Honor.
If you decide to single them out for that act and violate the law, you have undoubtedly injured them.
As to what it means--
Unknown Speaker: Yes, but have you injured them in anything other than an economic way?
They lose their job.
Do they get a lower--
Mr. Joyce: --Oh, I think you may very well have.
Obviously, each case may be slightly different, but when you fire somebody because he or she is determined arbitrarily to be too old, you're telling that person he no longer is a productive human being... it's time to retire.
Go out to pasture, you're no good... and that's the injury we think Congress was aiming at.
Unknown Speaker: --Do you want to say something about the third... what seems like a third part of the statute, that as you've talked about the tort like nature of the suit, and I might go along with that for the sake of argument, the IRS reg defines the words, damages received, all right, and so the damages have to be damages from a tort like suit.
Mr. Joyce: Yes, Your Honor.
Unknown Speaker: And also it says there somewhere in this background personal injury, and I'll go along with that.
This is a terrible insult, physical and psychological harm, et cetera.
I'll go along with that.
But it also says, and the IRS reg doesn't address this, that the damages in the tort like suit have to be on account of the personal injury, and so if, in fact, you have a tort suit, but the State, say, limits the damages in that tort suit so you can't recover for the personal aspect of the harm, but only the lost wages when the accountant was insulted and slandered, libeled, how can that be on account of the personal injury?
Mr. Joyce: Let me explain, Your Honor.
In that situation, the State circumscribes a remedy, or recognizes a cause of action, but does not have a separate count for pain and suffering.
Is that tort like?
Is it within the reach of the exemption?
Unknown Speaker: I say yes.
Let's assume it's tort like, absolutely.
Slander of an accountant is a tort, and let's also assume that in the background the poor accountant is suffering like mad, as people do when they're slandered or fired, that if you limit the damages just to the lost wages, for example, how is it damages on account of the personal injury?
Mr. Joyce: On account of, perhaps somewhat different from the phrase personal injuries, is not a precise term of art.
Unknown Speaker: Yes, but it still suggests that these personal injuries had something to do with--
Mr. Joyce: --That is correct, Your Honor.
Unknown Speaker: --on account of, and now that's the part I'd like you to address.
Mr. Joyce: There is a loose notion of causation underlying that term.
If there had been no personal injury, there would be no damages.
That is what we believe Congress--
Unknown Speaker: Simply but for, and then do you have authority for that, that it means only but for?
Mr. Joyce: --I believe that was not addressed in the 1918 legislative history.
I think most courts that have adjudicated this, and the IRS itself, now seems to be relying on this idea in Revenue Ruling 93 88, where it held that back pay alone in a statute that is otherwise within the coverage of this exemption is excludable.
So if you had a statute that was, as Your Honor is hypothesizing, otherwise satisfying the elements of this, there is sufficient causality to cause the measure of the damage that is expressed in terms of lost earnings to be within the reach of it, because the statute does say, any damages on account, so once there is a personal injury, any means any.
That is what we believe, and what the IRS--
Unknown Speaker: Well, never mind the measure, whether it's measured precisely by the personal injury.
Does... do you have to demonstrate that the personal injury has occurred?
Do you have to show that the individual knew about the age discrimination?
Mr. Joyce: --Which individual, the--
Unknown Speaker: The individual being discriminated against in an age discrimination case.
Mr. Joyce: --You do not have to show, necessarily, that the person was aware of that.
Unknown Speaker: That's the only personal injury.
That's the only personal... the feeling that the accountant had of being less of a human being.
Mr. Joyce: Right.
Unknown Speaker: Personal identity, whatever you said.
Mr. Joyce: Yes, Your Honor.
Unknown Speaker: If the person didn't even know about it... but he's still entitled to damages, isn't he?
Mr. Joyce: --He is, Your Honor, because--
Unknown Speaker: With no personal injury.
So it's not even but for.
Mr. Joyce: --I disagree in one respect, Your Honor, respectfully.
Congress presumes an injury to occur when invidious discrimination in violation of one of these classifications occurs.
Unknown Speaker: Oh, I see, so it doesn't have to be on account of.
Mr. Joyce: It does, Your Honor, because there has to be an act of discrimination.
There must be an act of discrimination, and there must be injury in this case.
Unknown Speaker: But I don't understand your first answer.
You're charging... in an age discrimination case, you're charging the employer with discriminating against you because of your age, so how do you... how can you not know about it?
Mr. Joyce: Well, I think Justice Scalia is hypothesizing a case in which it is quite possible a plaintiff may not be aware that the act is a violation of the ADEA.
At least, that was my interpretation.
Unknown Speaker: Well, by the time the complaint is filed she surely does.
Mr. Joyce: It is highly likely that by that point the plaintiff will be aware of it.
Unknown Speaker: When... if you're right that this... these damages under the age discrimination act should be treated just like damages for disparate treatment under title VII, and then we come to the jury, and the question that the judge asks counsel is, he says, well, this is excludable from income, I understand.
Therefore, I will tell the jury that the amount that they're going to award, to the extent it covers back pay, will not be taxed.
Would you agree, if you're right, that that should be the consequence?
Mr. Joyce: Yes, Your Honor.
In fact, I also think that's the law generally that the jury will be informed of that.
Unknown Speaker: Well, isn't there an irony, then, the one who ends up benefiting from this is the tortfeasor, because the jury will say, oh, well, we can give less because what we give is not going to be subject to tax.
Mr. Joyce: It is possible that the tortfeasor in the age case just like the tortfeasor in any tort case may have to pay less to the victims.
Unknown Speaker: But doesn't the judge also charge that they are supposed to make him whole, or her whole with respect to back wages?
Mr. Joyce: That would probably be the charge in an age case, Your Honor.
If I could emphasize, Justice Ginsburg, in any tort case it is possible we don't know in advance whether there'll be any incidental benefit to the tortfeasor, but the tortfeasor may have to pay less money.
If the victims are in a very strong bargaining position they will want a certain sum.
They will have a very strong case, and if the employer or defendant has to pay that but is relieved in some sense because the primary beneficiaries are relieved of that tax, we believe that is an unintended incidental benefit not primarily before Congress.
The regulations we emphasize, Your Honors, must be interpreted as they speak in terms of tort like laws, and this illustrates why they must be interpreted flexibly.
It is not simply tort laws that existed in 1919 or 1956, or any particular date, but a range of tort laws that must be accommodated under this statute.
That would include not only presumed damages under various State laws or the circumscribed tort remedies hypothesized by some members of the Court today, but even such causes of action as wrongful death.
Wrongful death is a good example of a statute or a remedy that has in many cases no xx for pain and suffering.
It is, however, frequently recognized by the IRS as being within the coverage of this exemption.
For example, revenue Ruling 84 108 recognizes as much.
Unknown Speaker: Well, since Lord Campbell's act and Lord Tenterden's act, wrongful death does compensate for pain and suffering, doesn't it?
I mean, those were changes in the 19th Century, I thought.
Mr. Joyce: Not all tort... or I believe not all wrongful death statutes do that, Your Honor.
Just as one example we cited a Colorado statute that was enacted in our brief.
The Federal Employers Liability Act also, I believe, does not provide a separate count for pain and suffering, and that illustrates a recognized tort like frame, namely those wrongful death statutes that would apparently not come within coverage, even though the Government has otherwise recognized such statutes to be tort like for purposes of the section 104(a)(2) exemption, incidentally illustrating, we feel, another inconsistency between the Government's litigating position in this case and its published revenue rulings.
Unknown Speaker: What kind of statutes are those, now, wrongful death statutes and any others that--
Mr. Joyce: --Wrongful death is a particularly clear example of it, Your Honor.
Unknown Speaker: --Okay.
Mr. Joyce: The ones that I mentioned, the Colorado statute we cited in our brief, the wrongful death statute in Revenue Ruling 84 108, the Federal Employer's Liability--
Unknown Speaker: Do you know for a fact that the Government has allowed deduct... or nonreporting of income under those particular statutes that--
Mr. Joyce: --Well, it's my understanding that the Revenue Ruling 84 108, which dealt with two wrongful death statutes... one is a Virginia statute and one is Alabama.
The Virginia statute, according to the ruling, states that there shall be compensation only for actual damages.
There wasn't a great deal of detail.
The Government in the course of its analysis in that ruling cited the Norfolk & Western v. Liepelt case, which is under the Federal Employers Liability Act.
That's cited in our brief.
That statute, as well, does not allow for pain and suffering.
The Government, nevertheless, in Revenue Ruling 84 108, concluded that the Virginia statute--
Unknown Speaker: --Yes, but isn't that commanded... forget the regulation provision, wouldn't the plain language of the statute have compelled that result, if it's on account of personal injuries?
Mr. Joyce: --Well, we think so, Your Honor, but the Government has taken the position for this case that there is an absolute prerequisite under the Burke analysis that there be a count for something like pain or suffering.
Unknown Speaker: Well, maybe... maybe that's explainable because that's real personal injuries--
--and real personal injuries you can get it for anything, but those personal injuries that qualify as such because they are tort like, then you make the investigation.
I think that's what Justice Stevens has suggested.
Mr. Joyce: That may be.
We feel that that does not--
Unknown Speaker: We didn't say that in Burke.
Like was the only category, I guess.
Mr. Joyce: --Nevertheless, we feel that illustrates why the Government's insistence on the presence of a pain and suffering count, as it were, is improper, is incorrect.
Indeed, the Government's position in its reply brief most explicitly seeks deference from this Court with respect to its view.
There is, however, no regulation addressing the age discrimination statute.
There's no revenue ruling.
There's no published announcement.
What the Government is seeking deference to in this case is its litigating position.
Unknown Speaker: Well, isn't it entitled to deference in interpreting its own regulation?
Mr. Joyce: It is entitled to deference with respect to agency views that first of all interpret a statute to which Congress has--
Unknown Speaker: No, my question was, isn't it entitled to deference in interpreting its own regulation?
Mr. Joyce: --Within limits it is, Your Honor.
In this case, we feel the Government is not entitled to deference because first of all its litigating position is what it's asking deference to.
That position is apparently at odds with... not only with statements in the court below, but published revenue rulings, and furthermore--
Unknown Speaker: Well, has it been inconsistent in its interpretation of its regulations as applied to this particular case?
Mr. Joyce: --Oh, I think so, Your Honor.
Just as an example, the Government does not seem to have a consistent... completely consistent view as to whether liquidated damages are exclusively punitive or not.
As part of its argument, the Government has stated that the Portal to Portal Act transformed FLSA liquidated damages, therefore affecting ADEA liquidated damages, while 25 years ago it said something different.
Unknown Speaker: Well, if the Government... if it turned out that we felt the Government were consistent in interpreting its regulation, would it then be entitled to deference in this case?
Mr. Joyce: From what I've heard, no, because the Government is going contrary to the decision in Burke.
Burke, I would just for the sake of recapitulation emphasize that there must be some elements of a tort like remedial scheme in addition to a personal injury.
The Court singled out jury trials because of the importance of damages.
It emphasized a range of nonwage damages.
It also cited the existence of punitive damages as one of the indicia.
Unknown Speaker: Yes, but that was on the tort side, but certainly it did not dispense with the requirement that the injuries be personal injuries.
Absolutely not, Your Honor.
The Court in that case and we think in other cases has presumed certain personal injuries to occur in an act of invidious discrimination, and the Government has conceded as much here.
What Burke said in addition, and in this respect adding an additional test beyond that advanced by Justices O'Connor and Thomas in their dissent, was that there must be an additional tort like frame.
That frame the Court in Burke derived from the remedial scheme, and those elements of the remedial scheme found to be absent in the Burke case are present here.
There are jury trials, there is a range of nonwage damages, and depending on how one weighs the compensatory versus punitive aspects of the ADEA, there in fact is a punitive role for ADEA liquidated damages, and so that brings this case squarely within the analysis of the majority in Burke.
Well, may I suggest another reading?
Was both the emphasis in Burke on jury trial and the emphasis on some range of headings of damages intended to point to a case like the typical tort personal injury case in which the jury has a considerable degree of discretion in determining what something is worth, e.g., what pain and suffering is worth, whereas in a case like this, number 1, as you said a moment ago, I presume the jury must be instructed with respect to the wage aspect of the claim, that they are simply to make the claimant whole, which is pretty much a mathematical exercise if the jury follows its instructions?
And number 2, assuming that it finds wilfulness, the wilfulness once again is pretty much a matter of math once the wage claim has been given a figure, isn't that correct?
Mr. Joyce: Yes.
Unknown Speaker: And if that is so, is this really the kind of case which the Court had in mind when it was pointing to the sort of discretionary valuation that juries make, and if the answer is no, then perhaps even though the jury and some panoply of remedy features are satisfied here, this still wouldn't fall within what Burke was getting at.
Mr. Joyce: Well, the reason I think that is not the case, Justice Souter, is first of all the Court did cite the Rickel case, an age discrimination appellate decision, and the court also had as a background, as it were, the post 1991 amendments showing how the addition of certain features to a remedial scheme can apparently transform the character of the damages.
There is a role for the jury in the age case.
The jury not only finds whether discrimination may occur, but the jury has a role in the determination of wilfulness on the part of the defendant.
As this Court noted in Burke, punitive damages may be an important part of tort law, both historically and currently, and so that is why I can't speak precisely as to what the Court may have had in mind in its majority opinion.
We feel that it was looking largely beyond the title VII statute at issue in that case.
It was looking for a, as it said, a range of damages.
It cited, again, I think on page 1873 of the opinion, the importance of having additional damages, including other consequential damages.
Unknown Speaker: But here the range is simply the liquidated damages double the back pay award.
It is not--
Mr. Joyce: That is right, Your Honor.
Unknown Speaker: --A range is one other remedy.
Mr. Joyce: It is one other remedy which, under prior decisions of this Court, Brooklyn Savings, Overnight Motor, was held to denote too difficult to measure, too obscure except for estimate by liquidated damages.
Unknown Speaker: But if the Court thought that... if the Court thought that jury discretion in a different sense, discretion in weighing evidence to determine in the first place whether there had been a discrimination and, in the second place, whether it was wilful was important, then there would have been no need, I suppose, to emphasize the range of damages too, and when you get to the range of damages, isn't that a signal that what the Court was really talking about was a discretion that goes beyond the kind of discretion that we talk about in fact finding, and points--
Mr. Joyce: Well--
Unknown Speaker: --to the kind of discretion that we speak of in terms of valuation, which does not seem to be present here?
Mr. Joyce: --I understand Your Honor's point.
I still don't think that's what the Court really had in mind, because if that were so, various other presumed damages such as defamation, defamation per se, that doctrine, would automatically be excluded from the reach of this statute, and as I indicated earlier, even other tort like statutes such as wrongful death are automatically beyond the reach, unless they provide a separate count.
Unknown Speaker: No, but in the presumed damages case, damages are presumed but the jury has to set the amount, whereas here, the jury does not have that kind of discretion.
The amount we're talking about in cases like this, if the jury follows its instructions, is essentially a matter of the arithmetic.
Mr. Joyce: It is a matter of arithmetic once there's a finding of wilfulness.
Unknown Speaker: Yes.
Mr. Joyce: And as to whether, for that matter, Congress decided to leave the apparent equation of the degree of reprehensibility to the existence of damages, though the Court in the Schmitz case, for example, concluded that that was in fact what was going on, that there is a presumed association with a degree of bad conduct on the part of the tortfeasor with those additional damages suffered by the plaintiff, and there is a role, a very distinct role for jury discretion in that case, Your Honor.
Mr. Chief Justice, if there are no further questions, I cede the remainder of my time.
Unknown Speaker: Thank you, Mr. Joyce.
Mr. Jones, you have 2 minutes remaining.
Rebuttal of Kent L. Jones
Mr. Jones: Thank you.
Just briefly, Justice Ginsburg, I wanted to point out that the irony that you referred to may be even broader than you noted.
In addition to the fact that, under Norfolk and Western, if the recovery were tax exempt the jury should be instructed of that, is the fact that under Brooklyn Savings, if the reward were excluded from tax it would be regarded as compensatory and therefore prejudgment interest would not be permitted.
Currently, pre judgment interest is allowed on ADEA claims because the liquidated damages component is regarded as punitive rather than as compensatory, but if it were regarded as exempt because it compensated for personal losses, it would fall precisely within the Brooklyn Savings holding that precludes prejudgment interest.
There are two steps involved in applying this statute, as there are in almost every tax statute that provides an exclusion from income.
Because such statutes have to be narrowly construed, the transaction has to meet both the form and the substance that Congress describes.
The form of such a transaction in this context is the nature of the claim, the Threlkeld test.
The Court went beyond the form of the claim in Burke and said it also has to meet the substance of the statute.
It has to provide remedies for the personal components of the loss, because otherwise, if it just compensates for the economic components, it doesn't fall within the scope of the statute as it should be strictly construed.
That is the sum and substance of the Internal Revenue Service's position.
I disagree, and our brief reflects the fact that we disagree with the respondent about whether we had been inconsistent.
I think that our brief... I'll have to rely on it for that, but I do want to point out specifically that since 1972, in rulings involving what was then title VII provisions and FLSA provisions, the Service ruled that if the statutory remedy only provides back wages and an equal amount of liquidated damages and doesn't compensate for the personal components, then it's not a recovery on account of personal injuries.
It's not a tort like remedy within the meaning of the regulation or the statute.
Unknown Speaker: May I ask one question?
What is the Service position for recovery in a tort of somebody driving somebody out of business, predatory contract, damages are totally economic?
Mr. Jones: Well, as you've described it, I'm confident that our position would be that it is an economic recovery, but I'm not--
Unknown Speaker: Okay.
Mr. Jones: --I'm not sure that I can think of an exact... a ruling on that point.
Chief Justice Rehnquist: Thank you, Mr. Jones.
The case is submitted.
Argument of Speaker
Mr. Jones: The opinion of the court in number 94-500 Commissioner of Internal Revenue versus Schleier will be announced by Justice Stevens.
Argument of Justice Stevens
Mr. Stevens: As it evidence from the title of the case, this is a tax case.
The respondent is a former employee of Untied Airlines who along with pursuant to the policy of the company was discharged when he reach the age of 60.
He and other employees bought sued against United Airlines alleging that the termination has violated the Age Discrimination and Employment Act of 1967.
Eventually the case was settled and he received a $145000.00 half of which was attributed to back pay and half to so called liquidated damages.
The question in the case is whether he has to pay income tax on the recovery that turns on the further question whether the amount he received was ?damages received on account of personal injuries or sickness within the meaning of the Internal Revenue.?
The Courts of Appeals have divided on the question in this case the Court of Appeals for the Fifth Circuit held that the income was not taxable.
We granted certiorari to resolve the conflict and for reason stated in an opinion filed with the clerk today, we reverse the Court of Appeals and conclude he must pay income tax on both portions of the settlement.
Justice Scalia has concurred in the judgment.
Justice O'Connor has filed a dissenting opinion in which Justice Thomas has joined entirely in which Justice Souter has joined part II.