United States v. Bradshaw Brief for Defendant-Appellant

    No. 9142

3 tt (H m tt  i j f  %  M nxUh
October Term , 1991

U n ite d  States of A m erica , pe t it io n e r

V.

T h erese  a . Bu r k e , et  a l .

ON WRIT OF CERTIORARI TO THE 
UNITED STATES COURT OF APPEALS 

FOR THE SIXTH CIRCUIT

REPLY BRIEF FOR THE UNITED STATES

Kenneth W. Starr 
Solicitor General 
Department of Justice 
Washington, D.C. 205S0 
(202) 5U-2217



TABLE OF AUTHORITIES
Cases: Page

Commissioner v. Glenshaw Glass Co., 348 U.S. 425
(1955).............. ........................... ............................ 4, 5

Commissioner V. Jacobson, 336 U.S. 28 (1949) ....... 4
Commissioner v. Miller, 914 F.2d 586 (4th Cir.

1990)............................................................... ......... 5, 7
Curtis V. Loether, 415 U.S. 189 (1974)..................  8
Davis V. Passman, 442 U.S. 228 (1979) .................  13
Hodge V. Commissioner, 64 T.C. 616 (1975) ........... 6
Johnson v. Georgia Highway Express, Inc., 417

F.2d 1122 (5th Cir. 1969) ..................................   6
King v. St. Vincent’s Hospital, No. 90-889 (Dec.

16, 1991) .............    4
Local No. 391 V. Terry, 494 U.S. 558 (1990) ..........  8
Lyeth V. Hoey, 305 U.S. 188 (1938)........................  2
NLRB  V. Federbush Co., 121 F.2d 954 (2d Cir.

1941) ....     4
Roemer v. Commissioner, 716 F.2d 693 (9th Cir.

1983).....................................................................  7
Shell Oil Co. v. Iowa Dep’t  of Revenue, 488 U.S.

19 (1988).................................................................  4
Social Security Board V. Nierotko, 327 U.S. 358

(1946) ...............    S
Sparrow v. Commissioner, No. 90-1151 (D.C. Cir.

Nov. 26, 1991) ................. ................................... 8,10, la
Starr els v. Commissioner, 304 F.2d 574 (9th Cir.

1962) ............................................................ ...........  5, 6
The Steel Trader, 275 U.S. 388 (1928) .................  8
Thompson v. Commissioner, 866 F.2d 709 (4th

Cir. 1989).........................................  6
United States v. Wells Fargo Bank, 485 U.S. 351

(1988)...........    4
Veazie v. Williams, 49 U.S. (8 How.) 134 (1850) ..8, 9,10 
Watkins v. United States, 223 Ct. Cl. 731 ^980).. 6

Statutes and regulation:
Civil Rights Act of 1991, Pub. L. No. 102-166, 105 

Stat. 1071:
§ 102, 105 Stat. 1072-1073 .................................  9

(I)



II

Statutes and regulation—Continued: Page
Civil Rights Act of 1964, Tit. VII, 42 U.S.C. 2000e

et seq....... .............................    1
42 U.S.C. 2000e-5(g)......    2,9

Internal Revenue Code of 1986,26 U.S.C.:
§61(a)._ ...............................................................  5
§ 104 (a) ............................................... ...............  6
§ 104(a) (2) ..............  'passim

26 C.F.R. 1.104-1 (c) ...............      12

Miscellaneous:
74 Am. Jur. 2d Torts (1974) ................................... 11
31 Op. A tt’y Gen. 304 (1918)................. ...................  5
Rev. Rul. 72-341,1972-2 C.B. 3 2 ................ ...............  6,12
S. 1384, 2 C.B. 71 (1920)............................................  5
1 Sedgwick’s Damages (9th ed. 1912) ..................... 8
Schultz, Investment in Human Capital, 51 Am.

Econ. Rev. 1 (1961)......   5
1 S. Speiser, C. Krause & A. Gans, The American

Law of Torts (1983) .............................................  11
J. Story, Commentaries on Equity Jurisprudence

(4th ed. 1846) .......................................................  8



3 n  O lim r t rtf M nxUh B M m
October T er m , 1991

No. 91-42
U n ited  States of A m erica , pet itio n er

V.

T h erese  a . Bu r k e , e t  a l .

ON WRIT OF CERTIORARI TO TEE 
UNITED STATES COURT OF APPEALS 

FOR THE SIXTH CIRCUIT

REPLY BRIEF FOR THE UNITED STATES

The issue in this case is whether payments received 
from an employer in settlement of back wage claims 
under Title VII of the Civil Rights Act of 1964, 42 
U.S.C. 2000e et seq., are excluded from gross income 
under Section 104(a)(2) of the Internal Revenue 
Code as “damages received * * * on account of per­
sonal injuries or sickness,” 26 U.S.C. 104(a)(2). 
We urge in our opening brief that: (a) Section 
104(a)(2) excludes from income damages received 
to compensate for a loss of human capital, Br. 9-15;
(b) it does not exclude settlement awards for back 
wages, which are taxed instead in the same manner 
as wages that are paid when earned, Br. 15-20; and
(c) the court of appeals accordingly erred in treat­
ing the settlement amounts paid to respondents as 
excludable, Br. 20-31.

( 1 )



Respondents agree that this case turns on whether 
a Title VII award is subject to the Section 104(a) (2) 
exclusion. They put forward, however, an extraordi­
narily expansive interpretation of the statutory provi­
sion, Respondents contend that Section 104(a) (2) ’s 
use of the term “damages” can describe “any mon­
etary recovery to remedy a wrongful act,” Resp. Br. 
9-19, and its use of the term “personal injury” can 
describe any “deprivation or invasion of ‘rights that 
an individual is granted by virtue of being a person 
in the sight of the law.’ ” Resp. Br. 19-30. Respond­
ents then argue, based on those broad definitions, that 
a Title VII award “squarely fits” within the Section 
104(a)(2) exclusion, because the recipient receives 
money for an injury to “one’s status as an equal 
human being.” Resp. Br. 31-44. Respondents’ argu­
ment is both far-reaching and far-fetched,

1. We address at the outset respondents’ equivocal 
characterizations of the Title VII settlement award 
that they received. See Resp. Br. 5-6, 24, 28, 29-30. 
As we explain in our opening brief, respondents re­
ceived payments arising from the settlement of a 
Title VII complaint alleging unlawful wage discrim­
ination. See U.S. Br. 2-4, 15-17. The only monetary 
relief then available under Title VII, and the only 
monetary relief sought in the complaint, was “back 
pay,” which a court may award as part of the “equi­
table relief” authorized by the statute. See 42 U.S.C. 
2000e-5(g). See Pet. App. 22a, 32a-33a, 34a; see 
also discussion at pp. 7-10, infra.

A settlement award has the same character for tax 
purposes as the underlying claim. See, e.g., Lyeth v. 
Hoey, 305 U.S. 188, 196 (1938). Thus, respondents’ 
settlement award must be treated as an award of 
Title VII back pay. U.S. Br. 17. Indeed, pursuant to



the terms of the settlement agreement, the employer 
deducted income and FICA taxes before paying the 
settlement sums to respondents. See Pet. App. 24a- 
25a. Respondents’ preference for the use of descrip­
tive terms other than back pay cannot disguise the 
substance of the settlement—the employer compro­
mised a wage-discrimination suit by giving affected 
employees additional pay for work that they had 
performed. See Pet. App. 32a-34a.

2. The question squarely presented, then, is whether 
a Title VII award for hack wages is excludable from 
gross income for purposes of federal taxation as 
“damages received * * * on account of personal injur­
ies or sickness,” 26 U.S.C. 104(a) (2). The intuitive 
answer is, of course, no. A Title VII back pay 
award is meant only to provide the recipient with the 
income she would have been paid in the absence of 
discrimination and is merely a substitute for wages 
that, if paid when earned, would have been subject 
to tax. See Social Security Board v. Nierotko, 327 
U.S. 358, 363-366 (1946) (holding that back pay 
awarded under the National Labor Relations Act 
(NLRA) for an unlawful discharge represents 
“wages” for purposes of the Social Security Act). As 
we explain in our opening brief, the Internal Revenue 
Service has long followed that sensible approach in 
Title VII and analogous contexts, ruling that back 
pay awards under the NLRA and awards of overtime 
compensation and unpaid minimum wages under the 
Fair Labor Standards Act are included in gross in­
come. See U.S. Br. 18-19.

Respondents nonetheless argue that a “back pay” 
award should not be taxed as if it were “pay.” They 
reach that counter-intuitive result through supposed re-* 
liance on the “plain language” of Section 104(a) (2).



Resp. Br. 9. Respondents analyze three central words 
found in Section 104(a) (2)—“damages,” “personal,” 
and “injuries”—by looking at each one in isolation 
and giving it the broadest definition that the word 
could carry by itself. They then combine those defi­
nitions without regard to the more specific meaning 
that the words convey by relation to one another. 
Under their interpretation. Section 104(a) (2 )’s ex­
clusion for “damages received * * * on account of 
personal injuries” would include “any monetary re­
covery to remedy a wrongful act” that has resulted 
in “a deprivation or invasion of rights that an indi­
vidual is granted by virtue of being a person in the 
sight of the law.” Resp. Br. 19.

Respondents’ composite approach is misconceived. 
Respondents ignore the settled rule that exclusions 
from income “should be construed with restraint” 
in light of Congress’s policy “to tax income compre­
hensively.” Commissioner v. Jacobson, 336 U.S. 28) 
49 (1949). Cf. United States v. Wells Fargo Bank, 
485 U.S. 351, 354-355 (1988). More fundamentally, 
their process of dissecting Section 104(a) (2 )’s lan­
guage one word at a time and then combining the 
products creates a predictably frankensteinian result 
that would wreak havoc on settled law. As this Court 
recently reiterated, words “are not pebbles in alien 
juxtaposition.” King v. St. Vincent’s Hospital, No. 
90-889 (Dec, 16, 1991), slip op. 6, quoting NLRB  v. 
Federbush Co., 121 F.2d 954, 957 (2d Cir. 1941) (L. 
Hand, J.). Instead, “the meaning of statutory lan­
guage, plain or not, depends on context.” King, slip 
op. 6. Close attention to the context of statutory 
terms frequently reveals a “more limited purpose” 
than those terms, construed in isolation, might sup­
port. See Shell Oil Co. v, Iowa Dep’t of Revenue, 488 
U.S. 19, 24-26 (1988).



The context here is decisive. As we explain in 
our opening brief, Section 61(a) of the Internal Rev­
enue Code requires a taxpayer to include all acces­
sions to wealth as gross income, unless the accession 
is subject to a specific exclusion. See U.S. Br. 9-10. 
Section 104(a)(2) provides a limited exclusion for 
“damages received * * * on account of personal 
injuries or sickness.” As this Court recognized in 
Commissioner v. Glenshaw Glass Co., 348 U.S. 426 
(1955), that exclusion is provided because compen­
satory damages for personal injuries function as “a 
restoration of capital for taxation purposes.” Id. at 
432 n.8. The lower courts have long emphasized that 
principle in explaining Section 104(a)(2). As the 
Ninth Circuit stated 30 years ago:

Damages paid for personal injuries are excluded 
from gross income because they make the tax­
payer whole from a previous loss of personal 
rights—because, in effect, they restore a loss to 
capital.

Starrels v. Commissioner, 304 F.2d 574, 576 (9th Cir. 
1962) (emphasis added) ; accord Commissioner v. 
Miller, 914 F.2d 586, 590 (4th Cir. 1990). See 
U.S. Br. 9-15.^

 ̂Eespondents assert that “ [i]t is unclear what, if anything, 
the Starrels court meant to add with the phrase referring to 
restorations of lost capital,” because “ [a]t that time, the eco­
nomic theory of human capital was not well developed.” Eesp. 
Br. 39 n.l3. This argument is devoid of merit. The Service 
articulated the concept of human capital more than 70 years 
ago. See S. 1384, 2 C.B. 71, 72 (1920) (citing 31 Op. Att’y 
Gen. 304 (1918)). This Court’s 1955 decision in Glenshaw 
Glass noted the Service’s “long history of departmental rul­
ings” on the subject. 348 U.S. at 432 n.8. And as respondents 
concede, a “leading proponent of human capital theory” had 
published an article on the concept of human capital prior to 
the Starrels decision. See Schultz, Investment in Human 
Capital, 51 Am. Econ. Eev. 1 (1961). See Eesp. Br. 39 n.l3.



The basic rationale for the Section 104(a)(2) 
exclusion—that the taxpayer should not be taxed on 
amounts received to restore lost human capital—is 
absent in the case of Title VII back-pay awards. A 
Title VII back-pay award, unlike an award of dam­
ages for personal injury, does not restore a loss of 
capital; instead, it provides the taxpayer with wages 
that, if paid when earned, would have been subject 
to tax. See Thompson v. Commissioner, 866 F.2d 709, 
712 (4th Cir. 1989); Watkins v. United States, 223 
Ct. CL 731 (1980); Johnson v. Georgia Highway Ex­
press, Inc., 417 F.2d 1122, 1125 (5th Cir. 1969); 
Hodge v. Commissioner, 64 T.C. 616, 619 (1975); 
Rev. Rul. 72-341, 1972-2 C.B. 32. There is no reason, 
under Section 104(a) or otherwise, why a delay in the 
payment of wages should result in their exclusion 
from income.

Respondents have no satisfactory response to this 
fundamental distinction between restoration of lost 
capital and delayed payment of wages. At first, they 
simply discount the importance of that difference. 
Respondents contend that the distinction “amounts to 
nothing more than pointing out that a back pay re­
covery compensates for economic loss caused by dis­
crimination” (Resp, Br. 10) and that there is no basis 
for distinguishing “economic harm” from “nonpecu- 
niary harm” (Resp. Br. 10, 11, 12, 37). The distinc­
tion that we draw, however, is not between economic 
and non-economic loss, but rather between compensa­
tory damages that, in effect, “restore a loss to capi­
tal,” Starrels, 304 F.2d at 576, and Title VII back 
pay awards, which are simply delayed payment of 
wages earned. See U.S. Br. 13-15.^

 ̂Respondents also express confusion over the Service’s 
treatment of “physical” and “non-physical” personal injuries. 
Resp. Br. 20 n.7. The Service’s position, however, is clearly



At a later point in their brief, respondents argue 
that “a Title VII back pay award is precisely com­
pensation for lost capital.” Resp. Br. 41 (emphasis 
in original). Respondents erroneously equate the de­
layed payment of wages with the restoration of capa­
bility to produce income. Title VII allows an equit­
able award of back pay to give the victim of wage 
discrimination her deserved wages for services per­
formed; that remedy does not take into account or 
seek to restore any asserted loss in ability to produce 
income. The recipient of a personal injury award, by 
contrast, receives an award specifically designed to 
compensate him for his loss in income producing ca­
pability. The mere fact that his loss in human capital 
may be measured by the net present value of his lost 
future income does not mean, as respondents suggest 
(Resp. Br. 41), that back pay is capital. See U.S. 
Br. 21 n.l6.

3. The natural and ordinary meaning of the stat­
utory terms “damages received” and “on account of 
personal injuries or sickness” preclude respondents’ 
proposed interpretation of 26 U.S.C. 104(a) (2).

a. As we have observed, respondents argue (Br. 
9-19) that Section 104(a) (2 )’s use of the term “any 
damages received” can be equated with “any mone­
tary recovery to remedy a wrongful act” (Br. 19).

stated in our opening brief. U.S. Br. 14 n.l3. As we explain 
there, the Service originally took the position that Section 
104(a) (2) excluded only compensation for physical injuries. 
In 1983, the Ninth Circuit concluded that nonphysical in­
juries, such as injury to one’s reputation, are encompassed 
within the Section 104(a) (2) exclusion. See Roemer V. Com­
missioner, 716 F.2d 693, 697 (1983). The Service no longer 
contends that the personal injury must be “physical.” Never­
theless, the recovery for the injury—whether physical or non­
physical—must be to compensate for a loss of human capital. 
See Commissioner v. Miller, supra.



8

This Court, however, has long recognized that a judi­
cial award of compensatory damages cannot be auto­
matically equated with an equitable remedy, such as 
restitution or back pay, that is provided as an inci­
dent to injunctive relief. See Local No. 391 v. Terry, 
494 U.S. 558, 571-572 (1990); Curtis v. Loether, 415 
U.S. 189, 196-197 (1974). Indeed, as respondents 
recognize (Resp. Br. 12-13), a unanimous panel of 
the D.C. Circuit recently concluded that Section 
104(a) (2 )’s use of the term “damages” provides a 
sufficient basis, by itself, to conclude that the Section 
104(a) (2) exclusion does not apply to Title VII back 
pay awards. Sparrow v. Commissioner, No. 90-1151 
(D.C. Cir. Nov. 26, 1991) {reprinted in App., infray 
la-17a).

When Congress first enacted Section 104(a)(2) 
in 1918, it was well established that damages are pro­
vided in actions at law “ ‘as compensation for loss 
sustained.’ ” The Steel Trader, 275 U.S. 388, 391 
(1928) (quoting 1 Sedgwick's Damages 24 (9th ed. 
1912)). It was also well established “that damages 
cannot be given in a court of equity” except “under 
peculiar circumstances.” Veazie v. Williams, 49 U.S. 
(8 How.) 134, 160 (1850) (citing, inter alia, J. 
Story, Commentaries on Equity Jurisprudence §§ 711, 
779, 788, 794 (4th ed. 1846)). The court of appeals 
in Sparrow concluded that Congress understood and 
observed that distinction when it formulated the In­
ternal Revenue Code’s Section 104(a)(2) exclusion 
and Title VII’s remedies. See App., infra, 6a-7a.

Congress specifically provided in Section 104(a) (2) 
that taxpayers may exclude certain types of “dam­
ages” from gross income, 26 U.S.C. 104(a)(2), and 
it specifically provided in Title VII that successful 
plaintiffs are entitled to “equitable relief” including



“back pay”—but not damages, 42 U.S.C. 2000e-5(g). 
The plain implication is that a taxpayer may not ex­
clude a Title VII back pay award because back pay 
is not the equivalent of a “legal” remedy of damages, 
but rather is an adjunct to injunctive relief. See 
App., infra, 7a-10a. That implication finds confirma­
tion in Congress’s recent amendments to Title VII, 
which authorize compensatory and punitive damages 
in certain prescribed circumstances, but retain the 
distinction between damages and back pay. See Civil 
Rights Act of 1991, Pub. L. No. 102-166, § 102, 105 
Stat. 1071, 1072.®

Respondents contend that the D.C. Circuit’s deci­
sion “rested on a fundamental error” because it 
“failed to recognize that equity courts could, in some 
circumstances, award ‘damages.’ ” Resp. Br. 13. But 
even if equity courts could award “damages” in 
“peculiar circumstances,” Veazie, 49 U.S. (8 How.) 
at 160, “back pay” would not constitute “damages” 
under the established meaning of that term. As this 
Court explained in Veazie, an equity court could pro­
vide monetary relief as an incident to an equitable 
remedy, such as by ordering an auctioneer who em­
ployed sham bids to give the purchaser a partial re-

® Section 102 of that Act provides that a Title VII plaintiff 
who brings a suit based on unlawful intentional discrimina­
tion and cannot recover damages under 42 U.S.C. 1981 “may 
recover compensatory and punitive damages as allowed in 
subsection (b) in addition to any relief authorized by [42 
U.S.C. 2000e-5(g)].” 105 Stat. 1072 (emphasis added). Sec­
tion 102 further states:

Compensatory damages awarded under this section shall 
not include backpay, interest on backpay, or any other 
type of relief authorized under [42 U.S.C. 2000e-5(g)]. 

105 Stat. 1073. Thus, Congress has emphatically reaffirmed 
its distinction between Title VII back pay and “damages.”



10

fund to “restore what was obtained by the puffing 
and fraud,” 49 U.S. (8 How.) at 160. But that 
remedy simply carries out the “established rule” 
that “the injured party is placed in the same sit­
uation, and the other party is compelled to do the 
same acts, as if all had been transacted with the 
utmost good faith.” Ihid. The monetary relief “is 
not giving damages either eo nomine or in sub­
stance.” Ihid. The same is true with respect to a 
Title VII back pay award, which places the employee 
“in the same position as if he had not been discrimi­
nated against, no more and no less.” Sparrow, App., 
infra, 16a.

Respondents further contend that the “standard 
definition of ‘damages’ * * * makes no distinction 
based on the form of the action” (Resp. Br. 13-14) 
and that courts have referred to back pay awards 
with the terminology of “damages” (Resp. Br. 15- 
17). The first contention is inaccurate, for the rea­
sons we have just explained. The second is entitled 
to little weight; the colloquial use of the term “dam­
ages” to describe Title VII back pay awards does not 
refiect a considered conclusion that “back pay” is the 
equivalent of “damages” for purposes of the Section 
104(a) (2) exclusion. In any event, those contentions 
are beside the point. The critical question here is 
what Congress intended. Respondents’ equation of 
the term “damages” with “any monetary recovery to 
remedy a wrongful act” cannot be reconciled with 
Congress’s carefully drawn distinction between “dam­
ages” and “back pay.” See Sparrow, App., infra.*

Respondents also argue (Resp. Br. 19-24) that Section 
104(a) (2) does not distinguish between “economic” and “non- 
pecuniary loss.” As we explain above, however, the relevant 
distinction is between compensation for a loss in human capi-



11

b. Even if a Title VII back pay award could in 
some sense be equated with compensatory “damages,” 
respondents would also be required to show that they 
received the award “on account of personal injuries 
or sickness.” Eespondents argue (Resp. Br. 31-44) 
that their back pay award tits that description be­
cause Title VII confers a “tort-type right” of free­
dom from employment discrimination and because 
discrimination “cuts to the heart of one’s status as 
an equal human being.” The first argument is inac­
curate while the second argument is insufficient to 
establish a “personal injury” within the normal 
meaning of that term.

Although respondents assert otherwise, there can 
be little doubt about the ordinary meaning of the 
term “personal injury” :

Under the American decisional law, the phrase 
“personal injury” denotes primarily an injury to 
the body of a person.

1 S. Speiser, C. Krause & A. Gans, The American 
Law of Torts §1.1, at 6 (1983) (citations omitted); 
accord 74 Am. Jur. 2d Torts § 2 (1974). The Serv­
ice has reasonably concluded that Congress employed 
the term “personal injuries” according to its pri­
mary usage. That conclusion finds support in Section

tal and a delayed payment of wages that would have been 
subject to taxation if paid when earned. Respondents’ differ­
entiation between “economic” and “non-economic” losses, like 
the distinction between “physical” and “non-physical” in­
juries, see note 2, supra, is not relevant to the question at 
hand. Respondents also contend (Resp. Br. 24-30) that 
“ [t] he fact that compensation for economic loss, such as back 
pay, is determined based on salary, does not turn it into 
compensation for services rendered.” A “back pay award” 
by definition, however, cannot be anything other than “com­
pensation for services.”



12

104(a) (2) ’s reference in the same phrase to “sick­
ness,” which also affects “the body of a person.” Al­
though the term “personal injury” is sometimes used 
to describe a broader group of “non-physical” in­
juries that are actionable as torts (such as defama­
tion), there is no basis for respondents’ contention 
that the term personal injury includes any injury 
that is “tort-type” or affects one’s “status as a human 
being.”

Respondents mistakenly argue (Resp. Br. 31-34) 
that the Service’s regulations indicate that all “tort- 
type” injuries should be treated as “personal in­
juries.” They rely on 26 C.F.R. 1.104-1 (c), which 
states in pertinent part:

Section 104(a)(2) excludes from gross income 
the amount of any damages received (whether by 
suit or agreement) on account of personal in­
juries or sickness. The term “damages received 
(whether by suit or agreement)” means an 
amount received (other than workmen’s compen­
sation) through prosecution of a legal suit or ac­
tion based upon tort or tort type rights, or 
through a settlement agreement entered into in 
lieu of such prosecution.

That regulation, however, reinforces the government’s 
position. The regulation does not purport to define 
the phrase “personal injuries.” Rather, it defines the 
term “damages received,” and indicates, as we have 
urged, that the term applies to compensatory damages 
awarded through a legal action in tort—i.e., money 
received through an action at law as “compensation 
for loss sustained.” See p. 8, supra. The Service 
has consistently adhered to the position that a Title 
VII back pay award is not the equivalent of an 
amount received through prosecution of “tort type 
rights,” see Rev. Rul. 72-341, 1972-2 C.B. 32, and its



13

interpretation of its regulation is entitled to defer­
ence. See U.S. Br. 23-24.

Respondents next argue (Resp. Br. 35-39) that 
“ [bjecause Title VII secures fundamental personal 
rights, injuries to those rights are inherently personal 
injuries.” That argument, however, is nothing more 
than a play on words. The inquiry whether a right is 
personal in the sense that an individual can enforce it 
(see Resp. Br. 35, citing Davis v. Passman, 442 U.S. 
228, 235 & n.lO (1979)) has nothing to do with the 
question whether the remedy is “on account of per­
sonal injuries or sickness,” 26 U.S.C. 104(a)(2). 
Respondents’ position, coupled with their further as­
sertion that “a right is personal if it inheres in one’s 
status as a human being” (Resp. Br. 35) would lead 
to absurd results. Under their test. Section 104 
(a) (2) would exclude every payment of money made 
in response to an individual’s claim of legal entitle­
ment. Indeed, the broad sweep of respondents’ test 
aptly illustrates how far one must go to equate the 
equitable remedy of back pay with “damages received 
* * * on account of personal injury or sickness.”

4. Finally, respondents contend (Resp. Br. 39-44) 
that treating a Title VII back pay award as “dam­
ages received * * * on account of personal injuries or 
sickness” would further “both the purposes of Title 
VII and § 104(a) (2).” At bottom, however, respond­
ents simply assert that victims of discrimination 
should be entitled to special tax treatment because 
“there are long-lasting effects of discrimination that 
no amount of money can heal” and special tax treat­
ment would give “recognition to the full gravity of 
the harm of discrimination.” Resp. Br. 44. The duty 
of the courts, however, is to apply the Internal Rev­
enue Code as written. The Code does not contain a



14

special exclusion for Title VII back pay awards, and 
the Section 104(a)(2) exclusion should not be con­
torted to achieve that result.

It is respectfully submitted, for the foregoing rea­
sons and the reasons stated in our opening brief, that 
the judgment of the court of appeals should be re­
versed.

Kenneth W. Staer 
Solicitor General

January 1992



APPENDIX

UNITED STATES COURT OF APPEALS 
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 30, 1991 
Decided November 26, 1991

No. 90-1151
Cleveland  Bu c h a n a n  Sparrow , Sr ., a ppel la n t

V.

Com m issioner  of I n ter n a l  R ev en u e , a p p e l l e e

Appeal from the United States Tax Court 
(Tax Court No. 10073-87)

Before M ik v a , Chief Judge, Se n t e l l e  and  H e n ­
derson , Circuit Judges.

Opinion for the court filed by Circuit Judge 
H enderson .

K aren  L e Craft  H enderson , Circuit Judge: The 
issue in this appeal is whether back pay awarded in 
settlement of a racial discrimination claim filed un­
der Title VII of the Civil Rights Act of 1964, 42 
U.S.C. §§ 2000e-l et seq. (1988), is excludable from 
a taxpayer’s income as damages received on account 
of a personal injury under section 104(a) (2) of the 
Internal Revenue Code. The Tax Court held that 
such an award is not. Sparrow v. Commissioner, 57 
T.C.M. (CCH) 816 (1989). We affirm.

(la)



2a

I,
This case was tried on stipulated facts below. The 

appellant, Cleveland B. Sparrow, Sr., was employed 
as a GS-9 computer specialist with the Department of 
the Navy for a period before February 14, 1977. On 
that date. Sparrow resigned his position after receiv­
ing a notice of removal and filed a complaint under 
Title VII  ̂ alleging, inter alia, that he had been the 
victim of racial discrimination. The Navy rejected 
Sparrow’s complaint. Sparrow then sought review 
by the Equal Employment Opportunity Commission 
(EEOC). On January 31, 1980, the EEOC held that 
the Navy had violated its regulations in terminating 
Sparrow and ordered it to reinstate him pending its 
investigation of Sparrow’s alleged unlawful discharge 
and other complaints. Although the Navy did begin 
an investigation, it did not reinstate Sparrow.

Thereafter, Sparrow sought an injunction enforc­
ing the EEOC’s order in the district court. The dis­
trict court denied Sparrow’s request as moot because 
the Navy had begun to investigate but its decision did 
not address the Navy’s failure to reinstate Sparrow.

Shortly after the Navy completed its investigation. 
Sparrow agreed to settle his complaint. Under the 
settlement agreement. Sparrow withdrew his request 
for a hearing on the complaint and also agreed not to 
initiate any future action or proceeding alleging ra­
cial discrimination or reprisal arising out of his em-

 ̂Under Title VII, a federal employee alleging that he has 
been the victim of racial discrimination must file his complaint 
with the agency he is employed by. Next, on receipt of the 
employer agency’s determination, the employee can either 
seek review by the Equal Employment Opportunity Commis­
sion or file suit in federal district court. Commission deci­
sions may be challenged in the district court. Brown v. GSA, 
425 U.S. 820, 832 (1976).



3a

ployment with the Navy. The settlement agreement 
covered Sparrow’s claims “in law or in equity, includ­
ing, but not limited to, any and all claims under the 
Back Pay Act of 1966 ^  . and Title VII of the Civil 
Rights Act of 1964 . . .  or the provisions of the United 
States Constitution.” 57 T.C.M. (CCH) at 817.

In return, the Navy agreed, among other things, 
to pay Sparrow the sum of $92,300. Of this amount, 
$69,284 was paid on Sparow’s claim for reinstate­
ment for the period from January 31, 1980, through 
October 27, 1982, when the Navy completed its inves­
tigation. The remaining $23,016® was allocated to 
the settlement of Sparrow’s remaining claims (and 
was expressly conditioned on Sparrow’s faithful per­
formance of his obligations under the agreement).

The Navy then paid Sparrow $71,202 in 1982, 
$15,344 in 1983 and $5,754 in 1984. Sparrow did 
not report any of these payments as income on his 
tax returns for the years 1982 through 1984. The 
Commissioner of Internal Revenue (Commissioner) 
issued a notice of deficiency determining that Spar­
row had under-reported his income in the years 1982 
through 1984 and assessed additional taxes and 
penalties.

Sparrow then filed a petition in the United States 
Tax Court arguing that the settlement payments were

2 The Back Pay Act entitles a federal employee, who has 
been “found by appropriate authority under applicable law, 
rule, [or] regulation . . .  to have been affected by an unjusti­
fied or unwarranted personnel action” resulting in the loss or 
reduction of pay, to recover back pay and attorney’s fees. 5 
U.S.C. § 5596(b) (1). The Back Pay Act does not itself give 
rise to an independent claim and therefore has no effect on our 
decision.

® This amount was actually paid in twelve monthly install­
ments. 57 T.C.M. (CCH) at 818.



4a

excludable from his gross income under section 
104(a)(2) of the Internal Revenue Code, 26 U.S.C. 
§ 104(a) (2), which provides that “gross income does 
not include . . .  the amount of any damages received 
. . .  on account of personal injuries.” Specifically, 
Sparrow argued that racial discrimination was a 
personal injury and that the payments he received in 
settlement of his claim of racial discrimination were 
therefore non-taxable damages.

The Tax Court did not agree. It first analyzed the 
nature of the payments Sparrow received under the 
settlement agreement, finding that $69,284 paid in 
settlement of Sparrow’s claim for reinstatement for 
the period from January 31, 1980, through October 
27, 1982, was compensation for the salary Sparrow 
“would have received had the Navy Department com­
plied with the EEO Commission’s reinstatement or­
der.” 57 T.C.M. at 819. Accordingly, the Tax Court 
held this amount of the settlement was back pay 
which was taxable as income. Id.

The Tax Court then turned to the remaining 
$23,016 of the settlement agreement. While it noted 
that “the character” of the payments “was not clearly 
described in the settlement agreement,” it concluded 
that the payments were “intended to be compensation 
in lieu of salary payments.” Id. In reaching this 
conclusion, the Tax Court first found that the settle­
ment agreement had provided for Sparrow’s retroac­
tive promotion from GS-9 to GS-11 effective Febru­
ary 14, 1976, one year to the day before Sparrow re­
signed. It then concluded that a portion of the 
$23,016 was attributable to the pay differential be­
tween the GS-11 salary he should have received and 
the GS-9 salary he actually received. While the rec­
ord does not indicate the precise amount, the Tax 
Gourt inferred that the portion of the $23,016 not



5a

attributable to the GS-ll/GS-9 pay differential “rep­
resented compensation [Sparrow] would have earned 
had he not been wrongfully discharged as found by 
the EEO Commission and remained on the payroll 
for a period either prior to January 31, 1980, or 
after October 27, 1982.” Id. The Tax Court also 
noted that the Navy had described the payments as 
“Nonemployee Compensation” on the 1099 Forms it 
filed with the Internal Revenue Service. The Tax 
Court viewed this as evidence that the Navy “in­
tended to make compensation rather than damage 
payments.”  ̂ Id. Finally, after reviewing the lan­
guage and legislative history of Title VII, the Tax 
Court concluded that, because Title VII authorizes 
only equitable remedies, including back pay, the pay­
ments received by Sparrow were not damages ex­
cludable from income under section 104(a)(2).

II.
Section 61 of the Internal Revenue Code defines 

gross income as “all income from whatever source de­
rived.” I.R.C. § 61(a), 26 U.S.C. § 61(a). The 
courts have consistently recognized that, in enacting 
this section. Congress intended to exercise “the full 
measure of its taxing power.” Commissioner v. Glen- 
shaw Glass Co., 348 U.S. 426, 429 (1955) (quota­
tions omitted). Thus, it has long been recognized that

 ̂Neither Sparrow nor the amicus curiae, a class of 101 
female federal employees who received back pay resulting 
from a sex discrimination claim against the U.S. Printing 
Office, challenges the Tax Court’s characterization of the pay­
ments as back pay or compensation in lieu of salary payments. 
Accordingly, we have no occasion to review the Tax Court’s 
findings regarding the nature of the payments Sparrow 
received.



6a

section 61 states a rule of inclusion. Id. at 430. In 
other words, unless another portion of the Internal 
Revenue Code specifically excludes an accession to 
wealth from taxation, a taxpayer must include it in 
his income.

A.
We deal here with one of the exclusions and its ap­

plicability to Sparrow’s back pay award. Specifically, 
we are required to construe section 104(a) (2) which 
provides in relevant part that “gross income does not 
include . . . the amount of any damages received 
(whether by suit or agreement and whether as lump 
sums or in periodic payments) on account of personal 
injuries or sickness.” There are two elements to this 
exclusion: (1) the amount received must be damages 
and (2) the amount received as damages must result 
from a personal injury or sickness. Accordingly, for 
Sparrow to prevail, he must show both that he re­
ceived damages and that they were received as com­
pensation for a personal injury.

The predecessor of section 104(a)(2) was orig­
inally enacted as section 213(b)(6) of the Revenue 
Act of 1918, ch. 18, 40 Stat. 1066. This statute ex­
pressly exempted from income “the amount of any 
damages received whether by suit or agreement on 
account of such [personal] injuries or sickness.” Id. 
(emphasis added). But neither the Revenue Act of 
1918 nor its legislative history defined the meaning 
of damages. See 40 Stat. 1066, §§ 1, 200; H.R. Rep. 
No. 767, 65th Cong., 2d Sess. 9-10 (1918). We do 
know that, at that time, damages were a remedy at 
law. See, e.g., Rice & Adams Corp. v. Lathrop, 278 
U.S. 509, 513 (1928) (“No ground for equitable jur­
isdiction properly could be alleged, for, plainly, none 
existed, and the bill was merely for an accounting of



7a

profits and damages, the remedy at law which was 
complete.”) (discussing Root v. Railway Co., 105 U.S. 
189 (1882)); United States v. Oregon Lumber Co., 
260 U.S. 290, 293 (1922) (“plaintiff in error brought 
an action at law . . .  to recover damages”) ; Frieder- 
iehsen v. Renard, 247 U.S. 207, 208 (1918) (plaintiff 
was not entitled to equitable relief but had remedy at 
law for damages); Archer v. Greenville Sand <fe 
Gravel Co., 233 U.S. 60, 64-66 (1914) (reversing dis­
missal of bill in equity because “bill show[ed] a con­
tinuing trespass of such a nature and of such char­
acter of injury that remedies at law by actions for 
damages would be inadequate” ) ; Javierre v. Central 
Altagracia, 217 U.S. 502, 508 (1910) (reversing 
grant of injunction because “a suit for damages would 
have given adequate relief, and therefore the appellee 
should have been confined to its remedy at law”). 
Damages remain today a remedy at law. See, e.g., 
Curtis v. Loether, 415 U.S. 189 (1974). Further­
more, a plaintiff seeking damages had then and re­
tains today the right to a jury trial under the seventh 
amendment. See, e.g., Curtis, 415 U.S. at 195-198; 
Ross v. Bernhard, 396 U.S. 531, 534 (1970); Capital 
Traction Co. v. Hof., 174 U.S. 1, 13 (1899); White- 
head v. Shattuck, 138 U.S. 146, 151 (1891).

We think these authorities make it clear that the 
term “damages” as used in section 104(a) (2) em­
bodies a monetary amount originally awarded at law, 
not in equity. We conclude that a taxpayer may ex­
clude an award obtained through the prosecution or 
settlement of a suit only if he first shows that the 
amount received constitutes damages as that term has 
been traditionally defined, that is, an award of money



8a

recoverable in an action at law.® We next consider 
whether a Title VII back pay award constitutes an 
award of damages under section 104(a) (2).

B.
The starting point for our analysis of whether back 

pay awarded under Title VII constitutes damages is 
the language of section 2000e-5(g) of that Title, 42 
U.S.C. § 2000e-5(g). Section 2000e-5(g), which pre­
scribes the remedies available when an employer has 
engaged in discrimination cognizable under section 
2000e-2, provides th a t:

the court may enjoin the respondent from engag­
ing in such unlawful employment practice, and 
order such affirmative action as may be appro­
priate, which may include, but is not limited to, 
reinstatement or hiring of employees with or 
without back pay . . .  or any other equitable relief 
as the court deems appropriate.

42 U.S.C. § 2000e-5(g) (emphasis added).
We, and every other circuit that has addressed the 

issue, have recognized that Congress, in enacting this 
section and providing for the recovery of back pay, 
did not make available the legal remedies of compensa­
tory and punitive damages but instead limited relief 
to equitable remedies.® See Bundy v. Jackson, 641

® After the taxpayer makes this showing, he must then show 
that the amount was received as a result of a personal injury. 
I.R.C. § 104(a) (2).

® Several courts have characterized back pay as an equitable 
remedy akin to restitution. Walker v. Ford Motor Co., 684 
F.2d 1355, 1364 n.l4 (11th Cir. 1982) (quoting Richerson v. 
Jones, 551 F.2d 918, 927 n.l3 (3rd Cir. 1977)) ; EEOC v. 
Detroit Edison Co., 515 F.2d 301, 309 (6th Cir. 1975). See



9 a

F.2d 934, 946 n.l2 (D.C. Cir. 1981); see also Cum- 
piano V. Banco Santander Puerto Rico, 902 F.2d 148, 
159 (1st Cir. 1990); Carrero v. New York City Hons. 
Auth., 890 F.2d 569, 581 (2d Cir. 1989); Mitchell v. 
Seaboard Sys. R.R., 883 F.2d 952, 955 (6th Cir. 
1989); Bennett v. Corroon & Black Corp., 845 F.2d 
104 106 (5th Cir. 1988), cert, denied, 489 U.S. 1020 
(1989); Keller v. Prince George’s County, 827 F.2d 
952, 955 (4th Cir. 1987); Protos v, Volkswagen of 
Am., Inc., 797 F.2d 129, 138 (3rd Cir.), cert, denied, 
479 U.S. 972 (1986); Patzer v. Board of Regents, 763 
F.2d 851, 854 n.2 (7th Cir. 1985); Muldrew v. 
Anheuser-Busch, Inc., 728 F.2d 989, 992 n.2 (8th 
Cir. 1984); Walker v. Ford Motor Co., 684 F.2d 1355, 
1363-1364 (11th Cir. 1982); Shah v. Mt. Zion Hosp. 
& Medical Ctr., 642 F.2d 268, 272 (9th Cir. 1981); 
Pearson v. Western Elec. Co., 542 F.2d 1150, 1152 
(10th Cir. 1976).

While the Supreme Court has not spoken directly 
on the issue, it has reminded us on several occasions 
that not all awards of monetary relief are properly 
characterized as the “ degaF relief” traditionally 
awarded in courts of law. Curtis, 415 U.S. at 196 
(1974); see also Porter v. Warner Holding Co., 328 
U.S. 395, 402 (1946) (equitable remedy of restitu­
tion “differs greatly” from damages). Moreover, in 
the seventh amendment context, the distinction be­
tween the legal remedy of damages and the equitable 
remedy of restitution has been consistently main­
tained. See, e.g., Curtis, 415 U.S. at 196 (1974). Be­
cause the available remedies are equitable, a Title VII

also Curtis v. Loether, 415 U.S. 189, 197 (1974) (“back pay 
[i]s an integral part of an equitable remedy, a form of restitu­
tion”) (comparing relief available under Title VIII, 42 U.S.C. 
§ 3612, with that available under Title V II).



10a

plaintiff has no right to a jury trial. Robinson v. 
Lorillard Corporation, 414 F.2d 791, 802 (4th Cir.), 
cert, dismissed, 404 U.S. 1006 (1971); Johnson v. 
Georgia Highway Express, Inc., 417 F.2d 1122, 1125 
(5th Cir. 1969).

In sum, the overwhelming weight of authority sup­
ports the view that an award of back pay under Title 
VII does not constitute the legal remedy of damages. 
Accordingly, it is not excludable from income under 
section 104(a) (2).

C.
Our conclusion that back pay is taxable finds ample 

support in the case law. See Thompson v. Commis­
sioner, 866 F.2d 709, 712 (4th Cir. 1989) (back pay, 
as distinguished from liquidated damages portion of 
award, includable in gross income); Johnston v. Har­
ris County Flood Control Dist., 869 F.2d 1565, 1579- 
80 (5th Cir. 1989), cert, denied, 493 U.S. 1019 
(1990) (“damages that constitute a back pay award 
under Title VII are not exempt under § 104(a) 
(2 )” ); Watkins v. United States, 223 Ct. Cl. 731 
(1980) (back pay awarded under Title VII consti­
tutes compensation for services and is includable in 
income); Coats v. Commissioner, 36 T.C.M. (P-H) 
1642 (1977) (same); Hodge v. Commissioner, 64 T.C. 
616 (1975) (same); cf. Sears v. Atchison, Topeka & 
Santa Fe Ry., 749 F.2d 1451 (10th Cir. 1984) (trial 
court properly included tax component in Title VII 
award). We cannot disregard such substantial au­
thority.

We recognize that our holding that a Title VII back 
pay award is not excludable from income conflicts 
with that of the Sixth Circuit. See Burke v. U.S., 929 
F.2d 1119 (6th Cir.), cert, granted, 60 U.S.L.W. 
3217, 3220-21 (Oct. 7, 1991). It also conflicts with



11a

the Third Circuit’s rationale in Rickel v. Commis­
sioner, 900 F.2d 655 (3rd Cir. 1990), where that cir­
cuit held that back pay awarded under the Age Dis­
crimination in Employment Act (ADEA), 29 U.S.C. 
§§ 621-634 (1988), is excludable. See also Pistillo v. 
Commissioner, 912 F.2d 145 (6th Cir. 1990). In our 
view, these cases reflect a misapprehension of the in­
quiry required under section 104(a) (2).

In Burke, the Sixth Circuit relied on the decision 
of the full tax court in Threlkeld v. Commissioner, 87 
T.C. 1294, 1299 (1986), aff’d, 848 F.2d 81 (6th Cir. 
1988), in concluding that a Title VII back pay award 
is excludable under section 104(a) (2). In Threlkeld, 
the Tax Court has stated:

Section 104(a)(2) excludes from income 
amounts received as damages on account of per­
sonal injuries. Therefore, whether the damages 
received are paid on account of “personal injur­
ies” should be the beginning and end of the in­
quiry. To determine whether the injury com­
plained of is personal, we must look to the origin 
and character of the claim (citations omitted), 
and not to the consequences that result from the 
injury.

87 T.C. at 1299 (quoted in Burke, 929 F.2d at 1121) 
(emphasis added). Seizing on this language the Sixth 
Circuit then concluded that “whether the § 104(a) (2) 
exclusion applies requires an examination of the na­
ture of the injury to determine whether the injury 
and claim are personal and tort-like in nature, and 
not whether the consequences of the injury resulted 
in an award of compensatory damages or damages 
for hack pay.” Burke, 929 F.2d at 1121 (emphasis 
added). In one sentence, the Sixth Circuit leap­
frogged over the damages requirement directly to the



12a
personal injury inquiry, at the same time fusing the 
distinction between damages and back pay universally 
recognized in Title VII cases.

To us, the Sixth Circuit’s decision is irreconcilable 
with Title VII precedent and misinterprets Threlkeld 
to boot. The holding in Threlkeld speaks only to the 
rule for determining whether a particular claim con­
stitutes a “personal injury” under section 104(a) (2). 
So limited, it makes complete sense to examine the 
“origin and character of the claim” and not its conse­
quences in determining whether it constitutes a claim 
for personal injuries. In Threlkeld, then, the Tax 
Court properly held that the injury to the taxpayer’s 
professional reputation arising out of a malicious 
prosecution was a personal injury even though the 
direct consequence of that injury was lost income. 
But in Threlkeld the taxpayer was entitled to recover 
damages under state law for his injury, see 87 T.C. 
at 1308, and thus both requirements of section 104 
(a) (2) were satisfied. Here, however, as in Burke, 
the taxpayer did not recover damages. Labelling 
“back pay” as damages, as the Sixth Circuit did, not 
only conflicts with the Supreme Court’s teaching that 
not all awards of monetary relief constitute the legal 
remedy of damages, Curtis v. Loether, 415 U.S. at 
196; Porter v. Warner Holding Co., 328 U.S. at 402; 
it also ignores the unanimous circuit court decisions 
holding that Title VII does not provide for damage 
awards.

For similar reasons, we also reject the approach 
taken by the Third Circuit in Rickel. Rickel relies 
on the legislative history of the amendment to section 
104(a) (2) effected by the Omnibus Budget Reconcili­
ation Act of 1989, 103 Stat. 2379. In Rickel, the 
Third Circuit noted that the bill initially would have 
amended section 104(a) (2) to limit the excludability



13a

of damage awards to those arising out of physical 
injuries and sickness. 900 F.2d at 664. The Rickel 
court found it significant that the House Ways and 
Means Committee report on the bill observed that 
“come courts have held that the exclusion applies to 
damages in cases involving employment discrimina­
tion” but the “committee believes that such treatment 
is inappropriate where no physical injury or sickness 
is involved.” Id. (citations omitted). Because Con­
gress did not adopt this provision but did amend sec­
tion 104(a) (2) to provide for the taxation of punitive 
damage awards, the Rickel court concluded that “Con­
gress chose to implicitly endorse the courts’ expansive 
interpretation of § 104(a) (2).” Id.

Inferring congressional intent from the failure to 
enact a legislative proposal is frequently a risky en­
terprise, cf. Avco Corp. V. United States Dep’t of 
Justice, 884 F.2d 621, 625 (D.C. Cir. 1989), and we 
find the Third Circuit’s rationale unpersuasive for 
several reasons. First, while we acknowledge that at 
the time the amendment was considered, the holding 
in Metzger v. Commissioner, 88 T.C. 834 (1987), 
aff’d without published opinion, 845 F.2d 1013 (3d 
Cir. 1988), that back pay awarded under Title VII 
was excludable from income had issued, our research 
indicates that it was the only case which had so held 
and was contrary to the weight of authority. See, 
e.g., Thompson v. Commissioner, 866 F.2d 709, 712 
(4th Cir. 1989); Watkins, 223 Ct. Cl. at 733; Hodge, 
64 T.C. at 619; Coats, 46 T.C.M. (P-H) at 1644; see 
also Pistillo v. Commissioner, 58 T.C.M. 1623 (P-H) 
(1989); Wirtz v. Commissioner, 58 T.C.M. 647 
(P-H) (1989). Congress could have rightfully con­
cluded that Metzger was nothing more than “a devia­
tion from the strong currents of precedent - a derelict 
on the waters of the law,” Lambert v. California,



14a

355 U.S. 225, 232 (1957) (Frankfurter, J., dissent­
ing), and thus viewed the adoption of the amendment 
as unnecessary.

Second, even were we to derive the same signifi­
cance that the Third Circuit did from Congress’s fail­
ure to enact the proposal to tax damages awarded on 
account of discrimination claims, it would be irrele­
vant to the issue before us. Here, unlike Rickel, we 
do not address whether a monetary award received 
through the prosecution of a claim under the ADEA, 
a statute which allows for the recovery of damages, 
is excludable from income under section 104(a)(2). 
See, Powers v. Ginnell Corp., 915 F.2d 34 (1st Cir. 
1990). Rather, we deal solely with Title VII which 
does not provide for the recovery of damages. Be­
cause only damages are excludable from income under 
section 104(a)(2), there was, and is, no need for 
Congress to act. This legislative history is simply 
beside the point.

What is relevant in the history of section 104 
(a) (2) is an understanding of the principle which 
underlies its enactment. Shortly before the enact-

In Rickel, the Third Circuit also relied on Byrne v. Com­
missioner, 883 F.2d 211 (3d Cir. 1989). In Byrne, the tax­
payer had been discharged for cooperating with an EEOC 
investigation of her employer. 883 F.2d at 212. Byrne brought 
claims under both section 215 (a) (3) of the Fair Labor Stand­
ards Act, 29 U.S.C. § 215(a) (3), which prohibits discharging 
or discriminating against an employee for testifying against 
an employer, and New Jersey law. 883 F.2d at 215. To re­
dress violations of section 215, Congress expressly provided 
for both legal and equitable relief, including liquidated dam­
ages. 29 U.S.C. § 216(b). There was, then, a basis for the 
Third Circuit’s conclusion that Byrne’s award was excludable 
under section 104 (a) (2) : it constituted damages. Moreover, 
damages were also recoverable under New Jersey law. 883 
F.2d at 216.



15a
ment of the predecessor statute to section 104(a) (2), 
the United States Attorney General had concluded 
that “the proceeds of an accident insurance policy 
[we] re not ‘gains or profits and income’ ” but instead 
represented a return of capital not taxable under the 
Supreme Court’s holding in Doyle v. Mitchell Broth­
ers Co., 247 U.S. 179, 185 (1918). 31 Op. Att’y. Gen. 
304 (1918). Only two years later, the Internal Reve­
nue Service noted that section 213(b)(6) of the 
Revenue Act of 1918, the predecessor of section 104 
(a) (2), was “merely declarative of th[is] conclusion 
. . . and intended to go no further.” S. 1384, 2 C.B. 
71, 72 (1920) (citing 31 Op. Att’y Gen. 304 (1918)). 
The Internal Revenue Service then noted that a “per­
sonal injury not resulting in the destruction or dimi­
nution of a capital asset would not be within the 
exemption.” Id. at 72,

Viewed against this background, we conclude that 
section 104(a)(2) does not make a Title VII back 
pay award excludable from income. An award of 
back pay simply does not represent a return of capi­
tal. It represents back wages which, although be­
latedly received, are nevertheless income.

III.
Our view that a back pay award is includable in 

income is also consistent with the congressional pur­
pose underlying Title VII. The remedies available 
under Title VII exist to make whole the employee 
discriminated against, that is, to place him in the 
same position he would have been in but for the dis­
crimination, but not to compensate beyond that. See 
Albemarle Paper Co. v. Moody, 422 U.S. 405, 421 
(1975) (“ [t]he central statutory purposes” of Title 
VII are “eradicating discrimination throughout the 
economy and making persons whole for injuries suf-



16a

fered through past discrimination” ). The Section-by- 
Section Analysis introduced by Senator Williams at 
the time the back pay provisions were enacted as part 
of the Equal Employment Opportunity Act of 1972 
stated:

The provisions of this subsection [the back pay 
subsection now codified at 42 U.S.C. § 2000e- 
5(g)] are intended to give the courts wide dis­
cretion exercising their equitable powers to fash­
ion the most complete relief possible. In dealing 
with the present section 706(g) the courts have 
stressed that the scope of relief under that sec­
tion of the Act is intended to make the victims 
of unlawful discrimination whole, and that the 
attainment of this objective rests only only upon 
the elimination of the particular unlawful em­
ployment practice complained of [through cease 
and desist orders], but also requires that persons 
aggrieved by the consequences and effects of the 
unlawful employment practice be, so far as pos­
sible, restored to a position where they would 
have been were it not for the unlawful discrimi­
nation.

118 Cong. Rec. 7168 (1972) (quoted in Albemarle 
Paper Co., 420 U.S. at 421) (emphasis added).

The taxing of a back pay award is consistent with 
the purpose of Title VII because it places the employee 
who has been discriminated against in the same posi­
tion as if he had not been discriminated against, no 
more and no less. Had Sparrow remained employed 
by the Navy, he would have received a salary from 
the Navy and been required to pay federal income tax 
on it. Congress, in enacting Title VII, chose to limit 
the scope of the remedies available in redressing 
Sparrow’s claim of discrimination. To hold that back



17a

pay is excludable from income would give Sparrow 
something more than he is entitled to under Title VII. 
In effect, it would give him a tax benefit thus plac­
ing him in a better position than had he not allegedly 
been discriminated against. In view of the injury 
Sparrow asserted, such a result might seem fair. But 
it would be contrary to congressional intent as evi­
denced by the explicit provisions of Title VII.

IV.
Having concluded that Sparrow’s back pay award 

does not constitute damages, we need not decide 
whether a claim of racial discrimination constitutes 
a “personal injury” under section 104(a)(2).® Ac­
cordingly, the decision of the Tax Court is

Affirmed.

® The court notes that Title VII has been amended by the 
newly-enacted legislation generally known as the Civil Eights 
Act of 1991, S. 1745, 102d Cong., 1st. Sess. (1991).

U . S .  GOVERNMENT PRINTING OPFICE; 1 9 9 2  3 1 2 3 2 4  4 5 2 3 1



a®

me



IN THE SUPREME COURT OF THE UNITED STATES 

OCTOBER TERM, 1991

UNITED STATES OF AMERICA, 
PETITIONER

V NO. 9 1 -4 2

THERESE A. BURKE, ET AL,

CERTIFICATE OF SERVICE

I t  i s  h e r e b y  c e r t i f i e d  t h a t  a l l  p a r t i e s  r e q u i r e d  t o  b e  s e r v e d  
h a v e  b e e n  s e r v e d  c o p i e s  o f  t h e  REPLY BRIEF FOR THE UNITED STATES 
b y  m a i l  on  J a n u a r y  1 3 , 1 9 9 2 .

(SEE ATTACHED COUNSEL LIST)

KENNETH W. STARR 
S o l i c i t o r  G e n e r a l

J a n u a r y  1 3 , 1992



O .s ,  V. BURKE. ET A L .. No. 9 1 -4 2  

COUNSEL: -

JOSEPH E. FINLEY, ESQ.
4 2 0 1  UNDERWOOD ROAD 
BALTIMORE, MD 21218
LUCINDA M. FINLEY, ESQ.
SUNY AT BUFFALO LAW SCHOOL 
O ' BRIAN HALL-AMHERST CAMPUS 
BUFFALO, NY 14260

JULIUS L . CHAMBERS 
CHARLES STEPHEN RALSTON 
NAACP LEGAL DEFENSE AND 

EDUCATIONAL FUND, INC.
99 HUDSON STREET 
NEW YORK, NY 10013

C. CABELL CHINNIS, JR .
ELAHNA R . STROM 
P H IL L IP  L . GORDON 
ELIZABETH B. DIXON 
JU L IE  E . VARLAND 
LATHAM & WATKINS 
1001 PENNSYLVANIA AVE, NW 
WASHINGTON, DC 20004

JOHN TOWNSEND RICH 
SHEA & GARDNER 
1800  MASSACHUSETTS AVE, NW 
WASHINGTON, DC 20036

ALISON C. WETHERFIELD
MARTHA F . DAVIS
NOW LEGAL DEFENSE & EDUC. FUND
99 HUDSON STREET
NEW YORK, NY 10013

STEVEN R. SHAPIRO, ESQ.
ASSOCIATE LEGAL DIRECTOR,
ACLU NATIONAL HEADQUARTERS 
132 W. 43RD STREET 
NEW YORK, NY 10036

DOUGLAS S . MCDOWELL, ESQ. 
MCGUINESS & WILLIAMS 
1015  15TH ST. NW, SUITE 1200 
WASHINGTON, DC 20005

ROBERT B. FITZPATRICK, ESQ. 
FITZPATRICK & VERSTEGEN 
4801  MASS. A V E., NW, STE 400 
WASHINGTON, DC 2 0 0 1 6 -2 0 8 7

JERRY H. ROBINSON, ESQ.
HELLER, EHRMAN, WHITE 

& MCAULIFFE 
333 BUSH STREET 
SAN FRANCISCO, CA 9 4 1 0 4 -2 8 7 8

CATHY VENTRELL-MONSEES, ESQ. 
AMER. ASSOC. OF RETIRED PERSONS 
601 E STREET NW 
WASHINGTON, DC 20049

WALTER J .  ROCKLER, ESQ.
ARNOLD & PORTER
1200 NEW HAMP AVE, NW
WASHINGTON, DC 2 0 0 3 6 -6 8 8 5

STEPHEN SELIGER, ESQ.
122 S . MICHIGAN, STE. 1850 
CHICAGO, IL  60602

MICHAEL B. ERP, ESQ.
KATZ, FRIEDMAN, SCHUR &

EAGLE, CHTD
7 S . DEARBORN S T .,  STE 1700 
CHICAGO, IL  60603

THOMAS F . JOYCE, ESQ.
BELL, BOYD & LLOYD 
THREE FIRST NAT'L PLAZA 
70 W. MADISON STREET, STE. 3200 
CHICAGO, IL  6 0 6 0 2 -4 2 0 7