Age Discrimination Awards Taxable Supreme Court Says Aging, Job Loss Not A Sickness

The Supreme Court ruled Wednesday that back pay and money damages won for an age discrimination claim are subject to federal income tax.

In a 6-3 vote, the justices said that an exemption in tax law for money obtained in a lawsuit “on account of personal injuries or sickness” does not cover age bias settlements or court awards.

The ruling, which reverses the U.S. Tax Court, comes when the nation’s work force is aging and corporate downsizing is the trend. More people are likely to be filing age-discrimination complaints, lawyers said, and Wednesday’s case, involving a United Airlines Inc. employee who was forced to retire when he turned 60, will effectively reduce money awards that older people win.

But Justice John Paul Stevens, writing for the majority, said, “Whether one treats (an individual’s) attaining the age of 60 or his being laid off on account of his age as the proximate cause of (his) loss of income, neither the birthday nor the discharge can fairly be described as a ‘personal injury’ or “sickness.”’

In general, federal law exempts from tax compensatory or punitive damages arising from personal injuries. But Congress in 1989 narrowed the exemption for punitive damages to situations involving physical injury or sickness.