Tax Ruling May Make Employment Cases Easier to Settle
Lawyers who represent management, and those who represent employees, tend not to agree on much. However, they probably will agree that a recent ruling from the United States Court of Appeals for the District of Columbia Circuit might make it easier to settle employment litigations. And for that both sides will be grateful.
There's little as boring as tax law, so here's the gist of it, sans the technical details. The case is Murphy v. IRS, decided on August 22, 2006. Money damages awarded for personal injuries historically have been treated as exempt from income tax. In pure personal injury cases, such as car crashes, this has been easy to apply. The courts have had a more difficult time with employment discrimination cases, in which the question is whether damages replace lost income, compensate for personal injury such as emotional distress, or a combination. Language in a 1996 statute presumptively treats all recoveries by plaintiffs in employment cases as taxable income. No one was happy about this except for the IRS, which stood to collect more money.
In Murphy, the court found that damages awarded to a fired employee for emotional distress and damage to her reputation are not income, and thus are not taxable. What is making waves, though, is the court's finding that it is unconstitutional for the IRS to consider such awards to be income.
Will the Supreme Court rule on the question? Right now no one knows, but employment lawyers are scrambling to take advantage of the ruling for their clients.