United States v. Burke Brief Amicus Curiae in Support of Respondents

    No. 91-42

In THE

tourt nf ISnttied
October Term, 1991

UNITED STATES OF AMERICA,

— V .-

THERESE A. BURKE, et al.,

Petitioner,

Respondents.

ON WRIT OF CERTIORARI TO THE 
UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

BRIEF A M IC U S CURIAE  OF THE AMERICAN CIVIL LIBER­
TIES UN IO N , NOW LEGAL DEFENSE AND EDUCATION  
FUND, AND NAACP LEGAL DEFENSE AND EDUCATIONAL 

FUND, IN SUPPORT OF RESPONDENTS

Steven R. Shapiro 
Isabelle Katz Pinzler 
American Civil Liberties Union 

Foundation 
132 West 43 Street 
New York, New York 10036 
(212) 944-9800

Julius L. Chambers 
Charles Stephen Ralston 
NAACP Legal Defense and 

Educational Fund, Inc.
99 Hudson Street
New York, New York 10013
(212) 219-1900

C. Cabell Chinnis, Jr.
(Counsel o f  Record)

Elahna R. Strom
Philip L. Gordon
Elizabeth B. Dixon
Julie E. Barland
Latham & Watkins
1001 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
(202) 637-2200
Alison C. Wetherfield 
Martha F. Davis 
NOW Legal Defense and 

Education Fund 
99 Hudson Street 
New York, New York 10013 
(212) 925-6635



TABLE OF CONTENTS
Page

TABLE OF AUTH O RITIES.............................................. iv

INTEREST OF ^ M /C /C t/R M F ......................................  1

SUMMARY OF ARGUMENT ........................................  2

ARGUMENT ....................................................................... 4

I. For over seventy years Congress and the courts 
have excluded from gross income damages 
received on account of any personal injury, 
including both physical and nonphysical injuries.
The Commissioner adds into section 104(a)(2) a 
distinction between physical and nonphysical 
injuries that conflicts with the plain terms of the 
statute, has no legislative or judicial support, and 
is logically flawed.................................    4

A.

B.

C.

D.

The Commissioner’s distinction between 
physical and nonphysical injuries conflicts 
with the plain terms of the statute and 
creates a restriction on section 104 (a)(2) 
that Congress considered and rejected. . . .

The distinction between physical and 
nonphysical injuries has been rejected by 
five Courts of Appeals and the Tax Court. .

The Commissioner’s proposed distinction 
leads to capricious results..........................   . .

There is no logical means to distinguish 
between physical and nonphysical injuries. .



II.

Page

E. The inexorable consequence of the Com­
missioner’s test is taxation of damages for 
physical injuries.................................................... 10

In applying section 104(a)(2), the Courts of Ap­
peals and the Tax Court have looked to the 
nature of the claim asserted by the victim. They 
have made no distinction between economic and 
noneconomic damages from personal injuries. . . . 12

A. The Courts of Appeals and the Tax 
Court have concluded that a “nature 
of the claim” test implements the 
intent of section 104(a)(2).................. 13

B. The Commissioner’s proposed test is 
at odds with the statute and this 
Court’s precepts in Woodward and 
Gilmore, and is based on an 
inapplicable theory regarding the 
taxation of damages............................. 16

III. The Commissioner’s proposed approach, in which 
damages attributable to a nonphysical injury are 
excludable only where they restore lost capital, is 
conceptually misguided, is contrary to the statute, 
and renders section 104(a)(2) superfluous................. 18

A  The Commissioner’s definition of “personal
capital” is conceptually misguided..................... 19

B. The Commissioner’s proposed test has
no basis in the statute........................................  21

C. The Commissioner’s argument renders sec­
tion 104(a)(2) superfluous.................................  22

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Page

D. The Commissioner’s test relies on a theory
that has no discernable scope.................................23

IV. Amounts received by respondents in settlement of 
their Title VII suit are excludable from income 
under section 104(a)(2)................. ..... ......................... 24

A. A violation of Title VII results in “personal
injuries” within the meaning of section 
104(a)(2)...............................................................  24

B. Title VII back pay awards are damages with­
in the meaning of section 104(a)(2)...................... 27

CO N CLU SIO N ....................................................................  28

111



TABLE OF AUTHORITIES
Page

CASES

Bent V. Commissioner, 835 F.2d 67 (3d Cir. 1987) . . . passim
Bernier v. Bernier, 147 U.S. 242 (1893) ..............................  22
Brooms v. Regal Tube Co., 881 F.2d 412

(7th Cir. 1989)....................................................................... 26
Byrne u Commissioner, 883 F.2d 211

(3d Cir. 1989) .................................................................  17, 25
Church V. Commissioner, 80 T.C. 1104 (1983)...............  8, 18
Commissioner v. Glenshaw Glass Co.,

348 U.S. 426 (1955) ...........................................  4, 21, 22, 23
Commissioner v. Miller, 914 F.2d 586 (4th Cir. 1 9 9 0 ).......... 8
Crane v. Commissioner, 331 U.S. 1 (1947) ............................6
Curtis V. Loether, 415 U.S. 189 (1974)................................. 25
Downey v. Commissioner, 97 T.C. 150 (1991) ....................  18
Doyle u Mitchell Bros. Co., 247 U.S. 179 (1 9 1 8 )...............  22
Escondido Mutual Water Co. v. LaJolla Band

o f Mission Indians, 466 U.S. 765 (1984)............................ 28
Glynn u Commissioner, 76 TC. 116 (1981) ....................... 24
Goodman v. Lukens Steel Co., 482 U.S. 656 (1987) . . .  25, 26 
Hawkins v. Commissioner, 6 B.T.A. 1023 (1927) . . 10, 20, 23 
James v. United States, 760 F.2d 590 (5th Cir. 1985) . . . .  16 
McDonald v. Commissioner, 9 B.T.A. 1340 (1928) . . . .  16, 23 
Metzger v. Commissioner, 88 T.C. 834 (1987), 

aff’d without opinion, 845 F.2d 1013
(3d Cir. 1988) .................................................................  15, 26

National-Standard Co. v. Commissioner,
749 F.2d 369 (6th Cir. 1984) ............................................... 4

Owens V. Okure, 488 U.S. 235 (1989) ................................. 26
Pistillo V. Commissioner, 912 F.2d 145

(6th Cir. 1990)...............................................................passim
Price Waterhouse v. Hopkins, 490 U.S. 228 (1 9 8 9 )............. 25
Redfield v. Insurance Co. o f N. Am.,

940 F.2d 542 (9th Cir. 1991) .............................................  13

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Page

Rickel V. Commissioner, 900 E2d 655
(3d Cir. 1990) .....................................................  8, 17, 24, 25

Roemer v. Commissioner, 716 F.2d 693
(9th Cir. 1983).................................................................. passim

Singer v. United States, 323 U.S. 338 (1 9 4 5 ).......................  22
Sparrow v. Commissioner, 1991 U.S. App.

LEXIS 27991 (D.C. Cir. Nov. 26, 1991) .........................  27
Thompson v. Commissioner, 866 E2d 709

(4th Cir. 1989).................................................................. passim
Threlkeld v. Commissioner, 87 T.C. 1294

(1986), ajf’d, 848 F.2d 81 (6th Cir. 1988)..................passim
Threlkeld v. Commissioner, 848 F.2d 81

(6th Cir. 1988)............................................................  7, 13, 15
United States v. Garber, 589 F.2d 843

(5th Cir.), rev’d, 607 F.2d 92 (5th Cir. 1979) .................. 10
United States v. Gilmore, 372 U.S. 39 (1963) .............passim
United States v. James, 478 U.S. 597 (1986) ....................... 16
United States v. Kaiser, 363 U.S. 299 (1960) .......................  20
Woodward v. Commissioner, 397 U.S. 572 (1970) . . 14, 15, 16 
Wulf V. City o f Wichita, 883 F.2d 842

(10th Cir. 1 9 8 9 ).................................................. 7, 13, 17, 25
Zabkowicz v. West Bend Co., 789 F.2d 540 

(7th Cir. 1986)............... .. ......................... ........................  26

STATUTES AND REGULATIONS

42 U.S.C. § 1981 (1988) ........................................... 25, 26, 27
42 U.S.C. § 1983 (1988) ................................ .. 25, 26, 27
Civil Rights Act of 1964, Tit. VII,

42 U.S.C. § 2000e et seq. (1988)......................... passim
I.R.C. (26 U.S.C.) § 6 1 (a ) ....................................................... 4
I.R.C. (26 U.S.C.) § 104(a) ...........................................5, 7, 27
I.R.C. (26 U.S.C.) § 104(a)(1).............................................. 27
I.R.C. (26 U.S.C.) § 104(a)(2) ......................................... passim
I.R.C. (26 U.S.C.) § 104(a)(3) ...........................    27
I.R.C. (26 U.S.C.) § 104(a)(4) ........................................   27

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Page

I.R.C. (26 U.S.C.) § 104(a)(5) .............................................  27
I.R.C. (26 U.S.C.) § 6305(b) ................................................  28
Omnibus Budget Reconciliation Act of 1989,

Pub. L. No. 101-239, § 7641(a), 103 Stat.
2106 (1989) (codified at 26 U.S.C. § 104
(Supp. I 1989)) ...................................................................... 7

Revenue Act of 1918, Pub. L. No. 65-254,
ch. 18, § 213(b)(6), 40 Stat. 1057 ........................................ 5

Treas. Reg. § 1.104-1(c) ..................................................  4, 27

OTHER AUTHORITIES

31 Op. Att’y Gen. 304 (1918) .........................  10, 20, 22, 23
Black’s Law Dictionaiy (5th ed. 1979)............................ 25, 27
Boris I. Bittker & Martin J. McMahon, Jr.,

Federal Income Taxation of Individuals (1 9 8 8 ) ...............  21
Fouts, Payments Received in Settlement o f 

Litigation and Claims, 25 N.Y.U. Inst.
Fed. Txn. 555 (1966) ..........................................................  18

H.R. Rep. No. 767, 65th Cong., 2d Sess. (1918)..................5
H.R. Rep. No. 40, 102d Cong., 1st Sess.,

pt. 1 (1991)...........................................................................  26
H.R. Rep. No. 247, 101st Cong., 1st Sess.,

reprinted in 1989 U.S.C.C.A.N. 2824 ................................... 7
Knickerbocker, The Income Tax Treatment o f 

Damages: A  Study in the Difficulties o f
the Income Concept, 47 Cornell L.Q. 429 (1962)............. 11

Rev. Rul. 56-518, 1956-2 C.B. 2 5 ...........................................8
Rev. Rul. 61-1, 1961-1 C.B. 1 4 ................................. 11, 16, 20
Rev. Rul. 72-341, 1972-2 C.B. 3 2 ...........................................9
Rev. Rul. 85-98, 1985-2 C.B. 5 1 ............................................. 8
Rev. Rul. 85-143, 1985-2 C.B. 5 5 ...................................  8, 20
William Shakespeare, Othello, act 4, sc. 2 .........................  19
Sol. Op. 132, I-l C.B. 92 (1922)....................... 12, 20, 22, 23
Sol. Op. 1384, 2 C.B. 71 (1 9 2 0 )...................................... 10, 20

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INTEREST OF AM ICI CURIAE^

The American Civil Liberties Union (“ACLU”) is a 
nationwide, nonpartisan organization of almost 300,000 mem­
bers, dedicated to protecting fundamental rights, including the 
right to equal treatment under the law. The ACLU has estab­
lished the Women’s Rights Project to work towards the elimi­
nation of the pervasive problem of gender-based discrimination. 
It is also involved in challenges to many other forms of discrimi­
nation including discrimination based on race, national origin, 
religion and disability. The ACLU has participated, both 
directly and as amicus curiae, in the litigation of many cases 
before the Supreme Court and other courts challenging various 
discriminatory practices. It submits this brief to support the 
proposition that victims of discrimination, like victims of other 
forms of wrongful conduct, should not be required to pay taxes 
on amounts recovered for violations of their legal rights.

The NAACP Legal Defense and Educational Fund, Inc., 
is a nonprofit corporation organized under the laws of the State 
of New York as a legal aid society. It was formed to assist 
African Americans to secure their constitutional and civil rights 
through the courts. For many years, its attorneys have 
represented parties and appeared as amicus curiae in this Court 
and in the lower federal courts on a broad range of issues, 
including both the substantive and procedural law relevant to 
cases of racial discrimination. It submits this brief because, if 
the government’s position is sustained in the present case, the 
effectiveness of the remedies for discrimination will be signifi­
cantly diminished and the burdens imposed on employers and 
employees by treating awards as taxable income will make 
settlement more difficult.

The NOW Legal Defense and Education Fund (“NOW 
LDEF”) was established as a nonprofit women’s rights law 
center in 1970 by founders of the National Organization for 
Women, and since that time has consistently worked on

1. Letters of consent to the filing of this brief have been lodged with 
the Clerk of the Court pursuant to Supreme Court Rule 37.3.

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important legal cases and in advocacy and public education 
concerning the rights of women. NOW LDEF has particular 
concern for discrimination against women in the workplace, and 
supports efforts to address the injuries arising from such 
discrimination. Consistent with these efforts, it submits this 
brief.

SUMMARY OF ARGUMENT

Since 1918, under what is now I.R.C. § 104(a)(2),^ 
Congress has excluded from gross income “any damages” that 
are received on account of a “personal injury.” This exclusion 
has applied without regard to whether the injury is physical or 
nonphysical, and the courts and the Commissioner have 
uniformly so held.

Consistent with the terms of the statute and this Court’s 
holding in United States u Gilmore, ' i l l  U.S. 39, 44 (1963), the 
Courts of Appeals and the Tax Court have unanimously looked 
to the “nature of the claim'' to determine the applicability of 
§ 104(a)(2). The nature of the damages is irrelevant. Once a 
victim has suffered a personal injury, § 104(a)(2) excludes from 
gross income all damages for both economic consequences {e.g., 
lost wages) and noneconomic consequences {e.g., pain and 
suffering). In accord with this test, four Courts of Appeals have 
held that recoveries for discrimination under Title VII of the 
Civil Rights Act of 1964, 42 U.S.C. § 2000e et seq. (1988), and 
other anti-discrimination statutes constitute damages received on 
account of a personal injury. The “nature of the claim” test is 
consistent with this Court’s precedent and is analytically sound. 
It should be upheld.

The Commissioner would have this Court establish a dif­
ferent standard. First, the Commissioner urges that § 104(a)(2) 
should be read to divide personal injuries into “physical” and 
“nonphysical” injuries. Second, the Commissioner has proposed 
that § 104(a)(2) should exclude from gross income recoveries

2. Internal Revenue Code (26 U.S.C.) § 104(a)(2) (hereinafter I.R.C. 
or the Code).

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for nonphysical injuries only to the extent they constitute a 
“return of capital.”

This Court should reject the Commissioner’s interpretation 
of § 104(a)(2). The separation of physical and nonphysical 
injuries conflicts with the clear terms of the statute, which make 
no distinction between physical and nonphysical injuries. 
Moreover, this proposed distinction has been expressly rejected 
by Congress, leads to capricious results, has been rejected by 
five Courts of Appeals and the Tax Court, and would inevitably 
lead to the taxation of damages for physical injuries as well.

The Commissioner’s second proposal should also be 
rejected because it, too, is at odds with the clear language of 
the statute itself and suffers from several additional flaws. First, 
the Commissioner’s proposed test fails to recognize that 
attributes such as integrity, self-respect, and dignity are as much 
a part of “human capital” as are arms and legs. Second, the 
test is without basis in the Tax Code and is technically and 
logically flawed. Third, the Commissioner’s test would render 
§ 104(a)(2) superfluous for nonphysical injuries: If § 104(a)(2) 
applied only to a “return of capital,” the provision would serve 
no purpose because a “return of capital” does not constitute 
income. Finally, this additional test relies upon a confusing 
theory of return of human capital that is of uncertain scope and 
application.

For all of the above reasons, the arguments offered by the 
Commissioner should be rejected. The judgment of the Court 
of Appeals should be affirmed.

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ARGUMENT

L For over seventy years Congress and the courts have 
excluded from gross income damages received on account 
of any personal injury, including both physical and 
nonphysical injuries. The Commissioner adds into section 
104(a)(2) a distinction between physical and nonphysical 
injuries that conflicts with the plain terms of the statute, 
has no legislative or judicial support, and is logically 
flawed.

Section 61(a) of the Code, which is the statutory starting 
point for a determination of gross income, provides that, except 
as otherwise stated in the Code, gross income includes “all 
income from whatever source derived.” All accessions to wealth 
realized by a taxpayer are therefore presumed to be gross 
income and taxable, unless the taxpayer can demonstrate that an 
accession fits into one of the specific exclusions created 
elsewhere in the Code. Commissioner v. Glenshaw Glass Co., 
348 U.S. 426, 430 (1955) (Congress intended to tax all gains 
except those specifically exempted).^ One such exclusion is 
codified at I.R.C. § 104(a)(2), which states:

[Gjross income does not include . . .  (2) the 
amount of any damages received (whether by suit 
or agreement and whether as lump sums or as 
periodic payments) on account of personal injuries 
or sickness . . . .

In interpretation of the statute, Treas. Reg. § 1.104-1 (c) further 
provides: “The term ‘damages received (whether by suit or 
agreement)’ means an amount received (other than workmen’s 
compensation) through prosecution of a legal suit or action 
based upon tort or tort-type rights, or through a settlement

3. The parties have apparently agreed that the award represents an 
“accession to wealth.” See Brief for the United States at 9 (hereinafter SG 
Brief). This determination, however, is a question of law subject to de novo 
review by this Court. See Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 
429 (195.5); see also National-Standard Co. v. Commissioner, 749 F.2d 369, 371 
(6th Cir. 1984).

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agreement entered into in lieu of such prosecution.” An exami­
nation of the statute itself, the circumstances surrounding its 
enactment, and subsequent judicial interpretations demonstrates 
that Congress intended to exclude from income all damages, 
including back pay, received on account of any personal injury, 
including nonphysical injuries such as discrimination.

In 1918, Congress enacted the legislative predecessor of 
what is now § 104(a)(2). Although Congress apparently shared 
the then-widespread belief that damages received on account 
of personal injuries were not even within the Sixteenth Amend­
ment’s definition of income,*' Congress wished to ensure that 
victims of personal injury would receive any recoveries for the 
injury free of taxation. Accordingly, § 213(b)(6) of the 
Revenue Act of 1918 excluded from gross income the follow­
ing:

Amounts received, through accident or health 
insurance or under workmen’s compensation acts, as 
compensation for personal injuries or sickness, plus 
the amount of any damages received whether by 
suit or agreement on account of such injuries or 
sickness.

Revenue Act of 1918, Pub. L. No. 65-254, ch. 18, § 213(b)(6), 
40 Stat. 1057, 1065-66. The provision has continued to the 
present with only minor modifications.^ It currently excludes

4. The legislative history of the Revenue Act of 1918 reflects this
belief:

Under the present law it is doubtful whether amounts received 
through accident or health insurance, or under workmen’s 
compensation acts, as compensation for personal injury or 
sickness, and damages received on account of such injuries or 
sickness, are required to be included in gross income.

H.R. Rep. No. 767, 65th Cong., 2d Sess. 9-10 (1918).

5. In its rearrangement of existing law in 1954, Congress chose to 
separate the provisions relating to the exclusion for workmen’s compensation 
payments, accident and health insurance proceeds, and damages for personal 
injury recoveries. See I.R.C. § 104(a). The regulations follow this division. 
This isolation of “personal injury” from other recoveries, such as accident and

(continued...)

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from gross income “the amount of any damages received . . .  on 
account of personal injuries or sickness.” I.R.C. § 104(a)(2).

Since its inception in 1918, § 104(a)(2) has therefore 
excluded from gross income all damages received by a victim of 
a personal injury on account of that injury. The provision has 
never contained any distinction between physical and 
nonphysical injuries.

A. The Commissioner’s distinction between physical 
and nonphysical injuries conflicts with the plain 
terms of the statute and creates a restriction on 
section 104(a)(2) that Congress considered and 
rejected.

Despite the clear terms of the statute excluding damages 
for “personal injury” without regard to physical or nonphysical 
injuries, the Commissioner proposes a test that would accord 
different treatment to damages depending upon whether those 
damages were received on account of a physical personal injury 
or a nonphysical personal injury. SG Brief at 14, 20-21. It is 
well-settled that “the words of statutes -  including revenue acts 
-  should be interpreted where possible in their ordinary, 
everyday senses.” Crane u Commissioner, 331 U.S. 1, 6 (1947). 
As three Courts of Appeals have noted in this context: “The 
ordinary meaning of a personal injury is not limited to a 
physical one.” Roemer u Commissioner, 716 F.2d 693, 697 (9th 
Cir. 1983).^

Moreover, the Commissioner’s distinction between 
physical and nonphysical injury was recently considered and 
rejected by Congress. In 1989, the House of Representatives

5.(...continued)
health insurance proceeds, provides further support that Congress believed that 
personal injuries may be more than purely physical.

6. This passage is quoted with approval in Bent v. Commissioner, 835 
F.2d 67, 70 (3d Cir. 1987). See Pistillo v. Commissioner, 912 F.2d 145, 148 
(6th Cir. 1990) (“the meaning of ‘personal injuries’ encompasses both physical 
and nonphysical injuries”).

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approved a provision that would have limited the exclusion of 
§ 104(a)(2) to amounts received on account of physical injury. 
The proposal was intended to reverse recent court decisions 
broadly interpreting § 104(a)(2) “to cover awards for personal 
injury that do not relate to a physical injury,” such as “cases 
involving employment discrimination and injury to reputation 
where there is no physical injury or sickness.” H.R. Rep. 
No. 247, 101st Cong., 1st Sess. 1354-55, reprinted in 1989 
U.S.C.C.A.N. 2824-25. At the time of the proposal, four Courts 
of Appeals and the Tax Court had interpreted § 104(a)(2) to 
exclude from gross income all damages received on account of 
a nonphysical personal injury, such as employment discrimina­
tion or defamation.’

The Conferees rejected the House proposal and refused 
to limit the exclusion in § 104(a)(2) to recoveries for physical 
injuries. Instead, Congress passed a much narrower provision 
that limited the scope of the exclusion for punitive damages. 
Under this provision, punitive damages from a nonphysical 
injury are now outside the scope of § 104(a).® Section 104(a) 
remained unaltered in all other respects.

B. The distinction between physical and nonphysical 
injuries has been rejected by five Courts of Appeals 
and the Tax Court

The Commissioner’s interpretation conflicts with the 
unanimous holdings of five Circuit Courts and the Tax Court. 
The Third, Fourth, Sixth, Ninth, and Tenth Circuit Courts of 
Appeals have determined that § 104(a)(2) covers damages from 
both physical and nonphysical injuries in equal measure.

7. See Wulf v. City o f Wichita, 883 F.2d 842 (10th Cir. 1989); 
Thompson v. Commissioner, 866 F.2d 709 (4th Cir. 1989); Threlkeld v. 
Commissioner, 848 F.2d 81 (6th Cir. 1988), aff’g  87 T.C. 1295 (1986); Bent, 
835 F.2d 637; Roemer v. Commissioner, 716 F.2d 693 (9th Cir. 1983).

8. See Omnibus Budget Reconciliation Act of 1989, Pub. L. No. 101- 
239, § 7641(a), 103 Stat. 2106, 2379 (1989) (codified at 26 U.S.C. § 104 (Supp. 
I 1989)).

7 -



Commissioner v. Miller, 914 F.2d 586, 589 (4th Cir. 1990) 
(defamation action is action for personal injuries); Pistillo v. 
Commissioner, 912 F.2d 145, 148 (6th Cir. 1990) (“the meaning 
of ‘personal injuries’ encompasses both physical and nonphysical 
injuries”); Rickel v. Commissioner, 900 E2d 655, 658 (3d Cir. 
1990) (“personal injuries” under § 104(a)(2) encompass both 
physical and nonphysical injuries); Thompson v. Commissioner, 
866 F.2d 709, 711 (4th Cir. 1989) (“relevant distinction [is] . . . 
not between physical and nonphysical injuries”); Bent v. 
Commissioner, 835 F.2d 67, 70 (3d Cir. 1987) (“ordinary 
meaning” of personal injury includes both physical and non­
physical injuries); Roemer, 716 F.2d at 697 (finding “ordinary 
meaning” of personal injury to include both physical and non­
physical injuries); Threlkeld v. Commissioner, 87 T.C. 1294, 1297 
(1986) (“[n]o distinction is made between physical and non­
physical . . . injuries”), aff’d, 848 F.2d 81 (6th Cir. 1988). Even 
the Commissioner has ruled that compensation for lost income 
received on account of a nonphysical injury is not taxable 
income. See Rev. Rul. 85-143, 1985-2 C.B. 55; Rev. Rul. 85- 
98, 1985-2 C.B. 51 (both holding that nonphysical injuries are 
within the scope of § 104(a)(2)); Rev. Rul. 56-518, 1956-2 C.B. 
25 (“damage to . . . professional or economic advancement” 
from Nazi persecution not taxable).

Not a single court has advanced any distinction between 
physical and nonphysical injuries in determining the scope of 
§ 104(a)(2) and its predecessors. The courts have specifically 
declined to do so when urged by the Commissioner. See, e.g.. 
Bent, 835 F.2d at 70; Church v. Commissioner, 80 T.C. 1104, 
1106 (1983). This Court should not impose such a distinction 
now.

C. The Commissioner’s proposed distinction leads to 
capricious results.

The distinction between physical and nonphysical injuries 
results in disparate treatment of similarly situated taxpayers 
under § 104(a)(2). As the Tax Court noted in its en banc

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opinion’ in Threlkeld, if a tortfeasor causes a surgeon to lose a 
finger, the loss will cause both noneconomic consequences (e.g., 
pain and suffering) and economic consequences (e.g., lost 
income). The entire amount of damages received is excludable. 
87 T.C. at 1300. If the surgeon’s injuries were nonphysical (e.g., 
defamation), the Commissioner would require that courts 
“delve[] into an inquiry regarding the nature of the conse­
quences of the injury,” id. at 1300-01, to determine which 
portion of the award represented a recovery for economic con­
sequences and which portion represented a recovery for non­
economic consequences. For nonphysical injuries, the Commis­
sioner would tax the recovery for economic consequences as an 
accession to wealth; The lost income would have been taxable 
when earned. SG Brief at 21. See Rev. Rul. 72-341, 1972-2 
C.B. 32. There is no logical basis for this distinction between 
these two tort victims, and this Court should not accept it. 
There is no reason to believe that Congress intended such 
inconsistencies. “We should be slow to attribute to Congress a 
purpose producing such unequal treatment among taxpayers, 
resting on no rational foundation.” Gilmore, 372 U.S. at 48.

D. There is no logical means to distinguish between 
physical and nonphysical injuries.

The Commissioner’s distinction between physical and 
nonphysical injuries is semantic and arbitrary. No principle of 
taxation provides any guidance for differentiating between 
recoveries for physical and nonphysical injuries.

The practical problems of the Commissioner’s proposed 
test are immediately apparent. A taxpayer whose back is 
broken suffers both broken bones and mental pain and 
suffering. He may also suffer a loss of wages if he is subse­
quently fired from his job. The Commissioner’s test would 
require courts to determine whether the firing took place as a 
result of the physical injury (impaired mobility) or the

9. Technically, the Tax Court does not sit en banc but rather reviews 
certain decisions as a “Full Court.”

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nonphysical injury (depression and anxiety). Similarly, a victim 
of discrimination on the job may suffer both an affront to her 
dignitary interests and headaches, ulcers, as well as other 
ailments. It becomes impossible as a practical matter to 
differentiate the harm from the effect on the tort victim.

There is no principle of taxation that would enable courts 
to make the distinctions in the Commissioner’s proposed test. 
Both an arm and intellect, for example, constitute human 
capital. See Hawkins v. Commissioner, 6 B.TA. 1023, 1025 
(1927) (reputation as human capital); 31 Op. Att’y Gen. 304 
(1918) (human body as “a kind of capital”), quoted in Sol. Op. 
1384, 2 C.B. 71, 72 (1920). Both can be damaged or dimin­
ished. Both can generate income. Neither has basis. See 
United States u Garber, 589 F.2d 843, 849-50 (5th Cir.) 
(Clark, J., dissenting), rev’d, 607 F.2d 92 (5th Cir. 1979).

The only apparent distinction between a physical injury 
and a nonphysical injury is the nature of the causal relation 
between harm and effect. The causal relation between physical 
intrusion and the resultant injury is often more readily 
perceived simply because there is tangible evidence showing the 
connection. This evidentiary difference, however, does not 
provide any principled means of separating the two types of 
injury and certainly has no relevance in taxation. From a tax 
perspective, this proposed distinction is plainly and simply 
arbitrary. This Court should reject the Commissioner’s attempt 
to require the courts to make such unprincipled distinctions.

E. The inexorable consequence of the Commissioner’s 
test is taxation of damages for physical injuries.

The Commissioner’s theory regarding nonphysical injuries 
would logically lead to taxation of damages for physical injuries, 
reversing over seventy-five years of unbroken precedent and tax 
policy. The Commissioner’s theory regarding taxation of 
damages for nonphysical injuries is simple. First, a back pay 
award for work performed represents an accession to wealth 
because it is a substitute for wages for services already provided, 
which would have been taxed as income if received currently

-  10



during emp!oymentd“ SG Brief at 7. (The Commissioner also 
extends this reasoning to wages received for wrongful termina­
tion. Id. at 26 n.20.) Second, because such a recovery rep­
resents an accession to wealth, the exclusion of § 104(a)(2) 
would not be available under the Commissioner’s test because 
the taxpayer could not establish that the recovery was a “reim­
bursement for a prior loss of personal ‘capital.’ ” Id. at 14-15.

This logic cannot be limited to nonphysical injuries. It 
applies with equal force to a pianist or surgeon whose hands 
are injured, or a construction worker whose back is injured, or 
a schoolteacher whose voice is impaired. The lost wages in 
Rev. Rul. 61-1, 1961-1 C.B. 14, for example, would be taxable 
because they would have been taxable when earned.

Indeed, the logic of the Commissioner’s position is not 
limited to back pay. Future earnings, like past earnings, are 
subject to tax when earned. Therefore, a recovery for loss of 
future earnings cannot be a tax-free return of capital. In sum, 
the logic of the Commissioner’s circular reasoning has no stop­
ping point except the full taxation of all damages measured by 
past or future loss of earnings. This reasoning would overturn 
almost seventy-five years of tax law excluding these recoveries 
from taxation.

The dramatic changes which would result from accepting 
the argument urged by the Commissioner have been consider­
ed and rejected by Congress. They should also be rejected by 
this Court.

10. This concept is discussed criticaiiy in Knickerbocker, The Income 
Tax Treatment o f Damages: A Study in the Difficulties o f the Income Concept, 
47 Corneil L.Q. 429, 435 (1962). Amici beiieve that respondents’ recovery 
does not represent back wages for the reasons stated infra p. 15 & n.l6.

11



n. In applying section 104(a)(2), the Courts of Appeals and 
the Tax Court have looked to the nature of the claim 
asserted by the victim. They have made no distinction 
between economic and noneconomic damages from per- 
soncil injuries.

A personal injury will often involve both economic conse­
quences, such as lost wages, and noneconomic consequences, 
such as pain and suffering.^ A surgeon whose hand is disabled 
or a baseball player whose back is injured will suffer both bodily 
pain and mental distress (noneconomic consequences) and lost 
wages (economic consequences). Valuation of a lost hand or a 
bad back can be so difficult that ultimately a victim may resort 
to the use of an economic yardstick to demonstrate the extent 
of the harm he has suffered, even though the noneconomic 
consequences may constitute the bulk of the harm.^^

Congress apparently has recognized that a personal injury 
frequently entails both economic and noneconomic conse­
quences and has written § 104(a)(2) to exclude both. Under 
the terms of § 104(a)(2), “any damages” are excluded so long 
as they are received on account of a personal injury (emphasis 
added).

11. The Courts of Appeals also use the term “nonpersonal con­
sequences” to describe economic consequences and “personal consequences” 
to describe noneconomic consequences. See, e.g., Bent, 835 F.2d at 70; Roemer, 
716 F.2d at 699. This brief uses the economic/noneconomic distinction merely 
to avoid confusion between a “personal injury” and its consequences, which can 
be both “personal” and “nonpersonal.”

12. As the revenue solicitor noted over sixty years ago:
The [personal] rights on the one hand and the money on the other are 
incomparable things which can not be placed on opposite sides of an 
equation. [Such a] personal right. . .  is not assignable and not suscep­
tible of any appraisal in relation to market values . . . .

Sol. Op. 132, I-l C.B. 92, 93 (1922).

-  12 -



A. The Courts of Appeals and the Tax Court have 
concluded that a “nature of the claim” test imple­
ments the intent of section 104(a)(2).

In following the clear wording of the statute, the Circuit 
Courts and the Tax Court have unanimously concluded that 
§ 104(a)(2) requires only that a court determine whether 
damages have been received on account of a personal injury. 
The fact that some of the damages may represent recoveries 
for economic consequences is of no import in assessing the 
taxability of damages. So long as the “nature of the claim” is 
that of a claim for personal injury, the resultant damages are 
excluded under § 104(a)(2).

An often-cited articulation of this “nature of the claim” 
test is in Threlkeld:

Section 104(a)(2) excludes from income amounts 
received as damages on account of personal injuries. 
Therefore, whether the damages received are paid on 
account o f “personal injuries” should be the beginning 
and end o f the inquiry. To determine whether the 
injury complained of is personal, we must look to 
the origin and character of the claim . . . , and not 
to the consequences that result from the injury.

87 TC. at 1299 (citations omitted) (emphasis added).^^ The 
Third, Sixth, Ninth, and Tenth Circuits have adopted this test, 
and the Fourth Circuit has adopted it in part. '̂'

13. In Threlkeld, the Tax Court held that § 104(a)(2) excluded from 
gross income a malicious prosecution settlement attributable to injury to the 
taxpayer’s professional reputation because the amount constituted damages 
received on account of personal injuries. See 87 T.C. at 1308.

14. Pistillo, 912 F.2d at 148 (3d Cir.); Threlkeld, 848 F.2d at 84 (6th 
Cir.); Redfield v. Insurance Co. o f N. A m , 940 F.2d 542, 544-45 (9th Cir. 
1991); Wulf, 883 F.2d at 872-73 (10th Cir.). The Fourth Circuit, in Thompson, 
866 F.2d at 712, seems to have adopted a bifurcated test. The Thompson 
court began with the proposition that the tax treatment of an award of 
liquidated damages and back pay received in a suit under Title VII and the 
Equal Pay Act turns on whether “the awards were received for personal

(continued...)

- 13 -



The courts’ uniform adoption of a “nature of the claim” 
analysis is appropriate for four reasons. First, and most impor­
tant, the test is consistent with the statute’s clear reference to 
“any damages,” and makes no distinction among the damages 
that may be received on account of personal injury.

Second, the use of a “nature of the claim” test to deter­
mine the nature of damages received on account of litigation 
comports with this Court’s holdings in the analogous area of 
the characterization of the consequences of litigation. In 
Gilmore, 372 U.S. 39, this Court held that the expense of 
defending a divorce suit was a nondeductible personal expense 
(rather than a deductible business expense) because its origin 
was personal rather than from the taxpayer’s business. The 
Court expressly rejected a test based upon the consequences of 
the litigation:

The principle we derive . . .  is that the 
characterization, as “business” or “personal,” of the 
litigation costs of resisting a claim depends on 
whether or not the claim arises in connection with 
the taxpayer’s profit-seeking activities. It does not 
depend on the consequences that might result to a 
taxpayer’s income-producing property from a failure 
to defeat the claim . . . .  [Sjuch a rule would lead 
to capricious results.

Id. at 48 (emphasis in original); see Woodward v. Commissioner, 
397 U.S. 572, 577-78 (1970). Like the “consequences test”

14.(...continued)
injuries through prosecution of a legal action based upon tort or tort-type 
rights.” Id. at 711. That is the Threlkeld test. The court then determined 
that a sex discrimination claim is a tort-type action. Id. at 712. The entire 
award, therefore, should have been excluded under § 104 (a)(2). The court, 
however, then focused on the nature of the damages received and determined 
that the liquidated damages award was excludable as compensatory damages, 
but the back pay award was not excludable because it was in the nature of a 
breach-of-contract award. Id.

15. As noted supra pp. 6-7, in 1989 Congress did exempt punitive 
damages for nonphysical injury from § 104(a)(2). Punitive damages are not 
at issue in this case.

- 14 -



rejected in Gilmore and Woodward, the Commissioner’s reliance 
here on the consequences of personal injury litigation would 
“encourage resort to formalisms and artificial distinctions.” Id. 
at 577.

Third, the “nature of the claim” approach is analytically 
sound because it avoids confusion between the personal injury 
itself and its consequences. As the Ninth Circuit noted: 

Although there are different types of defamation 
actions (libel or slander) depending on the form of 
the defamatory statements, all defamatory 
statements attack an individual’s good name. This 
injury to the person should not be confused with 
the derivative consequences of the defamatory 
attack, i.e., the loss of reputation in the community 
and any resulting loss of income. . . . The personal 
nature o f an injury should not be defined by its 
effect.

Roemer, 716 F.2d at 699 (footnote omitted) (emphasis added).
Finally, the “nature of the claim” test avoids confusion 

between what constitutes “damages” under § 104(a)(2) and how 
those damages, once found, are measured. Back pay or a simi­
lar economic yardstick is often simply used as a workable and 
expeditious means of measuring damages to a person’s digni­
tary rights. Congress and the courts have used such measure­
ments as a matter of convenience to protect rights that cannot 
be valued with any precision. As the Ninth Circuit has noted: 
“The nonpersonal consequences [i.e., an economic yardstick] of 
a personal injury, such as a loss of future income, are often the 
most persuasive means of proving the extent of the injury that 
was suffered.” Roemer, 716 F.2d at 699 (emphasis added).'*'

16. See Threlkeld, 848 F.2d at 84 (loss of future income “often the 
most persuasive means of proving the extent of the injury that was suffered” 
and “persona! nature of an injury should not be defined by its effect”); Bent, 
835 F.2d at 70 (“an award of damages for the violation of a constitutional right 
may be measured in whole or in part by the amount of lost wages”); Metzger 
V. Commissioner, 88 T.C. 834, 858 (1987), aff’d without opinion, 845 F.2d 1013 
(3d Cir. 1988) (loss of income may merely be an evidentiary factor or the best 
measure of loss).

- 15



B. The Commissioner’s proposed test is at odds with 
the statute and this Court’s precepts in Woodward 
and Gilmore, and is based on an inapplicable theory 
regarding the taxation of damages.

The Commissioner disregards the clear terms of the 
statute that exclude “any damages” and instead proposes a test 
that distinguishes between economic and noneconomic conse­
quences. According to the Commissioner, for nonphysical 
injuries, any receipt of back pay'^ (damages for economic 
consequences) represents an accession to wealth that should be 
taxed upon receipt by the tort victim. There is no basis in law 
or logic for such a distinction, and this Court should reject it.

First, there is no basis in the statute for distinguishing 
among different consequences from a personal injury. The 
statute states “any damages.” It contains no qualification. Any 
further elaboration would make it “ ‘read like an insurance 
company’s form [of] general release rather than a statute.’ ” 
United States v. James, 478 U.S. 597, 604 n.5 (1986) (quoting 
James u United States, 760 F.2d 590, 604 (5th Cir. 1985) (Gee, 
J., dissenting)). Despite the long history of a fully inclusive 
definition of damages,^® Congress has restricted § 104(a) only 
with respect to punitive damages for nonphysical injuries. 
Congress knows how to differentiate among types of damages 
for personal injury, yet it has declined to make the distinction 
the Commissioner now proposes.

17. Under the Commissioner’s theory, “back pay” includes not only 
wages for work already performed, but also wages received for a wrongful 
discharge, where no work was performed. SG Brief at 18, 26 n.20.

18. The Commissioner has long held that § 104(a)(2) excludes 
recoveries attributable to back pay. Rev. Rul. 61-1, 1961-1 C.B. 14. The 
courts have also construed damages from personal injury to include a broad 
range of harms. McDonald v. Commissioner, 9 B.T.A. 1340, 1341 (1928) 
(excluding from gross income damages for breach of contract to marry, 
including “loss of station to which the marriage would have advanced plaintiff’).

- 16 -



Moreover, although the Commissioner has repeatedly 
attempted to have courts accept a distinction between economic 
and noneconomic consequences, these attempts have met with 
a string of defeats. In Roemer, 716 E2d at 697, the Ninth 
Circuit found no basis for distinguishing between economic 
recoveries (e.g., lost wages) and noneconomic recoveries (e.g., 
pain and suffering); Section 104(a)(2) applied even “when the 
predominant result of the injury is a loss of income.” Following 
the decision in Roemer, the full Tax Court (by a 15-1 vote) and 
the Third, Sixth, and Tenth Circuits also rejected any distinction 
between economic and noneconomic consequences.^’

In an attempt to find some support for his proposed 
distinction, the Commissioner argues that the taxability of 
recoveries should be determined under the principle that 
damages should be taxed in the same manner as the items they 
replace. SG Brief at 17. Back pay for lost wages, for example, 
would be taxable when received as damages because they would 
have been taxable when earned. This “substitution principle” 
is based on the theory that a payment received in settlement of 
a claim is simply a substitute for what the taxpayer would have 
received if there had been no dispute between the parties in

19. Rickel v. Commissioner, 900 F.2d 655, 661 (3d Cir. 1990) (nature 
of claim controlled; irrelevant whether damages, including back pay, compensate 
taxpayer for economic losses); Byrne v. Commissioner, 883 F.2d 211, 214 (3d 
Cir. 1989) (“relevant inquiry” in concluding settlement under New Jersey anti- 
discrimination law excludable “is whether the settlement was received on 
account of personal or non-personal injuries, not whether the damages 
compensate the taxpayer for economic losses”); Bent, 835 F.2d at 70 (3d Cir.) 
(settlement for First Amendment violation “admittedly” based on lost wages 
excludable; loss of future wages “often the most persuasive means” of proving 
extent of injury); Pistillo, 912 F.2d at 150 n.6 (6th Cir.) (specifically rejecting 
the Commissioner’s proposed distinction in ADEA action between award of 
back pay and compensation for loss of human capital: “[Wjhether [defendant] 
paid [the taxpayer] a portion of the settlement award to compensate him for 
pain and suffering or lost back pay is irrelevant to the § 104(a)(2) inquiry”); 
Wulf, 883 F.2d at 872-73 (10th Cir.) (award for lost wages -  including the 
portion of the recovery specifically representing back pay -  was excludable 
under § 104(a)(2) for First Amendment violation); Threlkeld, 87 T.C. at 1308 
(damages received in settlement of malicious prosecution suit, including those 
for injuries to professional reputation, are excludable under § 104(a)(2)).

- 17



the first place. See Church, 80 T.C. at 1108; Fouts, Payments 
Received in Settlement o f Litigation and Claims, 25 N.Y.U. Inst. 
Fed. Txn. 555, 556 (1966). This argument is flawed for two 
reasons. First, the argument begs the question. Lost wages 
may merely be a yardstick for other damages. See supra p. 15 
& n.l6. An award for an injury to dignitary interests does not 
constitute back pay. Second, § 104(a)(2) clearly constitutes an 
exception to the “substitution principle.” See Downey v. 
Commissioner, 97 T.C. 150, 164 (1991) (§ 104(a)(2) “allows the 
exclusion for damages that are a substitute for amounts or items 
that otherwise would be taxable or would potentially produce 
taxable benefit, such as income lost as a result of a personal 
injury”). Even the Commissioner concedes that the exclusion 
of § 104(a)(2) applies to payments received in lieu of wages by 
virtue of physical injury. These wages, however, would also 
have been taxable when earned and would therefore be taxable 
under the substitution principle.^®

TTT. The Commissioner’s proposed approach, in which 
damages attributable to a nonphysical injury are exclud­
able only where th ^  restore lost capital, is conceptually 
misguided, is contrary to the statute, and renders sec­
tion 104(a)(2) superfluous.

In his attempt to exclude respondents’ awards from the 
scope of § 104(a)(2), the Commissioner introduces the concept 
that a recovery received on account of a nonphysical injury is 
excludable from income only if it compensates the taxpayer for

20. The Commissioner also protests that “tax-free” recoveries constitute 
an improper windfall where they would otherwise have been taxable. SG Brief 
at 22 n.l6. The Commissioner’s argument is not relevant in determining the 
scope of § 104(a)(2). First, victims of personal injury are accorded the 
exclusion of § 104(a)(2) because the award, even if proximately measured by 
back pay or lost wages, are to compensate for a personal injury, an interest for 
which there is no ready price. See Pistillo, 912 F.2d at 150. Second, there is 
no reason to believe that Congress has not maintained the exclusion out of a 
sense of compassion for the victims of personal injury. Roemer, 716 F.2d at 
696 n.2.

18 -



a prior loss of “personal capital.” SG Brief at 14. Because a 
damage award measured by back pay purportedly would not 
constitute such a recovery, the amount would be taxable. See 
SG Brief at 20-21, 26 n.20. This Court should reject the 
Commissioner’s proposed approach.

A. The Commissioner’s definition of “personal capital” 
is conceptually misguided.

The Commissioner concedes that damages received on 
account of physical injuries, even when measured by back pay, 
constitute a return of personal capital and are not taxable. SG 
Brief at 21 n.l6. The Commissioner then argues that damages 
received on account of nonphysical injuries, when measured in 
precisely the same fashion, cannot constitute a return of 
personal capital. SG Brief at 26 n.20. This position is ill- 
conceived and conceptually misguided. A person’s intellect, 
integrity, self-respect and good name are as much “personal 
capital” as are arms and legs and good health. All are essential 
aspects of a human being.^^

The issue is not whether income can be generated from 
such personal capital. Nor is the issue whether such income, 
when generated, can be taxed. The issue is whether damages 
received from an injury to such personal capital are or should 
be taxed and, more specifically, in this case, whether such 
damages should be taxed when the injury was caused by years 
of invidious discrimination based upon the sex of the injured 
party.

21. See William Shakespeare, Othello, act 3, sc. 3:
Good name in man and woman, dear my lord,
Is the immediate jewel of their souls:
Who steals my purse steals trash; ’tis something, nothing; 
’Twas mine, ’tis his, and has been slave to thousands;
But he that filches from me my good name 
Robs me of that which not enriches him.
And makes me poor indeed.

- 19



It is undisputed that the tax law does not and should not 
tax the possession or enjoyment of “personal capital” such as 
good health or a fine intellect. See Hawkins, 6 B.TA. at 1025. 
The Commissioner’s own rulings have long recognized this 
principle. From 1918 to the present, the IRS has steadfastly 
maintained that damages received on account of a personal 
injury should not be taxed because they are a return of 
personal capital. See Sol. Op. 1384, 2 C.B. at 72 (citing 31 Op. 
Att’y Gen. 304 (1918)); Rev. Rul. 61-1, 1961-1 C.B. 14; Rev. 
Rul. 85-143, 1985-2 C.B. 55 (citing rulings).

While these rulings have been couched in technical tax 
terms such as “basis” and “return of capital,” as Justice 
Frankfurter acknowledged in United States u Kaiser, 363 U.S. 
299, 311-12 (1960) (Frankfurter, J., concurring), these rules are 
technically suspect but unquestionably correct:

The principle at work here [in the Commissioner’s 
holdings in Sol. Op. 1384 and Sol. Op. 132,1-l C.B.
92 (1922)] is that payment which compensates for a 
loss o f something which would not itself have been 
an item o f gross income is not a taxable payment.
. . .  If a capital asset is sold for no more than its 
basis there is no taxable gain. The result, then, is 
the same if it is destroyed and there is paid in 
compensation no more than its basis. There are, to 
be sure, difficulties, not present where ordinary 
assets are involved, in applying this principle to 
compensation for the loss of something which has 
no basis and which is not ordinarily thought of as 
a capital asset, such as health or life or affection or 
reputation. . . .

[In recoveries for personal injury,] the thing 
lost and compensated for was not an item of taxable 
income, but an aspect of capital or analogous to 
capital, which obviously would not have been 
included in gross income had it been retained.

-  20 -



Id. (emphasis added).^^
The Commissioner’s rulings cited above are technically 

questionable because in reality such “personal capital” has no 
measurable basis. Because “personal capital” has no basis, 
theoretically any amount received as compensation for its loss 
is technically “gain.” The rulings, however, are also unquest­
ionably correct in excluding such theoretical gain from taxation. 
They are correct for one simple and overriding reason: Any tax 
system that reached a different result would be one that placed 
the technical theory of gain and loss and income above basic 
concepts of value and human dignity.

B. The Commissioner’s proposed test has no basis in 
the statute.

The Commissioner’s “return of capital” theory' also suffers 
from the flaw that it has no basis in the statute. In fact, there 
is not one shred of evidence in the statute that Congress 
intended to limit the term “any damages” to awards that 
constitute a return of capital. Neither the statute itself nor the 
legislative history refers to such a concept. Moreover, there are 
substantial reasons to believe that Congress did not intend that 
the courts read a return of capital qualification into § 104(a)(2). 
Such a reading would render § 104(a)(2) a nullity and introduce 
a complex and difficult test into tax administration.

22. Under a traditional application of the return of capital theory, all 
personal injury recoveries (which are by definition compensatory only, Glenshaw 
Glass, 348 U.S. at 432 n.8) do not constitute accessions to wealth. The 
Commissioner’s distinction between “return of capital” and “gain or profit” 
would therefore have no application for compensatory damages, whether those 
damages compensated for economic or noneconomic consequences. It is also 
arguable that, regardless of considerations of tax theory, Congress has accepted 
the Commissioner’s de facto exclusion of these items from income through con­
tinued congressional acquiescence. See Boris I. Bittker & Martin J. McMahon, 
Jr., Federal Income Taxation of Individuals I  3.6, at 3-20 (1988) (arguing for 
such congressional acquiescence).

21 -



C. The Commissioner’s argument renders section 104 
(a)(2) superfluous.

The Commissioner argues that, for nonphysical injuries, 
§ 104(a)(2) should exclude only those recoveries that represent 
a “return of capital” to the taxpayer.^ Acceptance of the Com­
missioner’s “return of capital” argument reads § 104(a)(2) out 
of the Code. This Court should reject it.

The Commissioner’s position could not be more clear. 
According to his argument, respondents must establish that “the 
recovery is reimbursement for a prior loss of personal 
‘capital’ . . . and does not represent gain or profit that ‘instead 
add[s] to [their] wealth.’ ” SG Brief 14-15 (citations omitted). 
It is equally clear, however, if a taxpayer can establish that a 
reimbursement is a return of capital, the amount does not 
constitute income in any event and would not be taxable under 
the Sixteenth Amendment. 31 Op. Att’y Gen. 304; Sol. Op. 
132, I-l C.B. at 93; see Doyle v. Mitchell Bros. Co., 247 U.S. 
179, 185 (1918) (return of capital not income).

If the amounts received constitute a “return of capital,” 
then under this Court’s holding in Doyle, the amounts do not 
constitute income and by definition they are not taxable under 
the Sixteenth Amendment. The Commissioner, however, would 
limit the exclusion of § 104(a)(2) to precisely those recoveries. 
At least with respect to nonphysical injuries, the Commissioner’s 
test would read § 104(a)(2) out of the Code. This Court has 
long held that an interpretation of a statute that renders the 
statute a nullity cannot be adopted. Singer v. United States, 323 
U.S. 338, 344 (1945) (Court avoids interpretation that makes 
provision redundant); Bernier v. Bernier, 147 U.S. 242, 245 
(1893) (statutes must be interpreted so that one section “will 
not defeat or destroy another, but explain and support it”).

23. Relying on footnote 8 of Glenshaw Glass, the Commissioner argues 
that the Court “did not reject” his position, taken since 1918, that recoveries 
for personal injuries do not constitute income to the extent they “correspond 
to a return of capital.” SG Brief at 13.

-  22 -



Because acceptance of the Commissioner’s argument would 
have this precise effect, that construction should be rejected.

D. The Commissioner’s test relies on a theory that has 
no discemable scope.

The Commissioner’s test also suffers from the arbitrary 
distinction between what constitutes a “return of capital” versus 
“gain or profit.” The Commissioner argues that recoveries of 
back wages on account of a physical injury are a return of capi­
tal. SG Brief at 21 n.l6. But the Commissioner insists that 
recoveries for back wages on account of a nonphysical injury 
are not a return of capital. SG Brief at 26 n.20. These two 
situations, however, are indistinguishable. In both cases the 
victims are prevented from earning their wages either because 
(for example) the employer’s machinery tortiously injured the 
employee or because (for example) the employer 
discriminatorily fired the employee. There is no discemable 
reason to conclude that human capital includes the ability to 
obtain an income stream in the former instance and not in the 
latter. The Commissioner attempts to distinguish the two tort 
victims by arguing that back wages for nonphysical injuries 
represent wages that should have been paid but were not. This 
distinction, however, provides no guidance regarding the 
contours of “human capital” since both tort victims cannot work 
and do not receive wages.

Nor do cases or rulings illuminate the inquiry. Because 
of the novelty of the Commissioner’s test, no court has ever 
examined this issue in determining the scope of § 104(a)(2). In 
fact, the only guidance available predates Glenshaw Glass by at 
least twenty years. See McDonald v. Commissioner, 9 B.T.A. 
1340, 1341 (1928) (damages for breach of contract to marry); 
Hawkins, 6 B.TA. at 1025 (defamation); Sol. Op. 132, I-l C.B. 
at 93 (defamation, alienation of affections, surrender of a child); 
31 Op. Att’y Gen. 304 (personal injury). The Commissioner’s 
test is unwarranted under the statute and, because of the lack 
of definiteness of “human capital,” injects vast uncertainty into 
tax administration. This Court should reject it.

23 -



IV. Amounts received by respondents in settlement of their
Title V n suit are excludable from income under sec­
tion 104(a)(2).

As discussed supra pp. 13-15, the Tax Court and the 
Courts of Appeals have uniformly based the tax treatment of 
damages received through suit or settlement on the nature of 
the claim giving rise to the awards. Because suits brought 
under Title VII allege a personal injury within the meaning of 
§ 104(a)(2), any damages received through prosecution or 
settlement of a Title VII action fall squarely within the 
exclusion. Because the back pay awards received by respond­
ents are “damages received . . .  on account of personal injuries” 
within the meaning of § 104(a)(2), the entire award is 
excludable from gross income.

A. A violation of Title VII results in “personal 
injuries” within the meaning of section 104(a)(2).

Although § 104(a)(2) does not define the term “personal 
injuries,” the Tax Court and the Courts of Appeals have con­
sistently interpreted it to have two components. First, to 
qualify as an injury, the alleged harm must give rise to “some 
sort of tort claim against the payor.” Glynn v. Commissioner, 
76 T.C. 116, 119 (1981); Pistillo, 912 F.2d at 148; Rickel, 
900 F.2d at 658. Second, a “personal” injury requires the Court 
to distinguish between personal and nonpersonal injuries. 
Roemer, 716 F.2d at 697 (“relevant distinction that should be 
made is between personal and nonpersonal injuries”); 
Thompson, 866 F.2d at 711 (same). An injuiy to property, for 
example, would be a “nonpersonal” injury. Because a claim for 
violation of Title VII meets both requirements, it is a claim on 
account of “personal injuries” within the meaning of 
§ 104(a)(2).

A claim of employment discrimination implicates a tort or 
tort-type right in either of two ways. First, it may allege a 
breach of duty that “arises by operation of law,” “independent

24 -



of any duty an employer might owe his employee pursuant to 
an express or implied employment contract.” Byme v. Commis­
sioner, 883 E2d 211, 215 (3d Cir. 1989) (violation of FLSA’s 
duty not to discriminate against whistleblowers); see Pistillo, 912
F.2d at 149 (violation of ADEA’s duty not to discriminate on 
the basis of age); Rickel, 900 E2d at 662 (same); Thompson, 
866 E2d at 712 (“tort action is one for ‘a direct invasion of 
some legal right of the individual’ independent of contract”) 
(quoting Black’s Law Dictionary 1335 (5th ed. 1979)). An 
employment discrimination action also vindicates a tort-type 
right when it alleges “any invasion of the rights that an 
individual is granted by virtue of being a person in the sight of 
the law.” Threlkeld, 87 T.C. at 1308; see Bent, 835 E2d at 69 
(42 U.S.C. § 1983 (1988) violation; invasion of right to freedom 
of speech); Wulf, 883 E2d at 873 (same).

An action based on Title VII falls squarely within either 
definition. A claim under Title VII seeks to remedy an alleged 
violation of the employer’s statutory duty not to discriminate on 
the basis of race, color, religion, sex or national origin, a duty 
independent of any contractual duty' an employer might owe its 
employees. 42 U.S.C. § 2000e-2 (1988); Thompson, 866 E2d at 
712 (“right to be free from unreasonable gender discrimination 
is a personal right” independent of contract). Similarly, it has 
long been held that discrimination on the basis of sex, race, or 
national origin results in an invasion of the individual rights and 
dignity of the person. See, e.g., Goodman v. Lukens Steel Co., 
482 U.S. 656, 661 (1987) (race discrimination, challenged under 
42 U.S.C. § 1981 (1988), “is a fundamental injury to the 
individual rights of a person”); Curtis v. Loether, 415 U.S. 189, 
195 n.lO (1974) (analogizing race discrimination to a “dignitary 
tort”); Price Waterhouse v. Hopkins, 490 U.S. 228, 264 (1989) 
(O’Connor, J., concurring) (violation of Title VII, “the statutory 
employment ‘tort,’ ” similar to common law tort). Respondents’ 
Title VII claim alleging unlawful gender discrimination, 
therefore, seeks vindication of tort-type rights.

A violation of Title VII also results in an injury to the 
person of the claimant. Courts have frequently noted the physi­
cal and psychological injuries resulting from workplace dis-

25 -



crimination on the basis of sex, race or national origin. See, 
e.g., Zabkowicz v. West Bend Co., 789 F.2d 540, 542 (7th Cir. 
1986) (doctor’s diagnosis of “ ‘gastro-intestinal disease due to 
[sexual] harassment at work’ ”); Brooms v. Regal Tube Co., 881 
E2d 412, 417 (7th Cir. 1989) (severe, debilitating depression 
caused by sexual and racially motivated harassment in work­
place). Congress, too, has recognized that personal injuries 
result from workplace discrimination:

Victims of intentional discrimination often endure 
terrible humiliation, pain and suffering while on the 
job. This distress often manifests itself in emotional 
disorders and medical problems, which in turn cause 
victims of discrimination to suffer substantial out- 
of-pocket medical expenses and other economic 
losses as a result of the discrimination . . . .  The 
Committee intends to confirm that the principle of 
anti-discrimination is as important as the principle 
that prohibits assaults, batteries and other inten­
tional injuries to people.

H.R. Rep. No. 40, 102d Cong., 1st Sess., pt. 1 at 14-15 (1991) 
(emphasis in original). These injuries to the person of the 
victim are clearly distinct from nonpersonal injuries to the 
victim’s property rights or contract rights. They also are distinct 
from the nonpersonal consequences of the injury, such as loss 
of income. Because a suit brought under Title VII seeks to 
vindicate tort-type rights, the violation of which causes physical 
and psychological harm to the claimant, respondents’ claims of 
gender discrimination under Title VII are “personal injuries” 
within the meaning of § 104(a)(2). '̂‘

24. Recently, in Owens v. Okure, 488 U.S. 23.5 (1989), this Court held 
that the general limitations statute for personal injury actions applies to claims 
brought under 42 U.S.C. § 1983, including a claim for gender discrimination 
under the Equal Protection Clause. In so holding, this Court stated that 
§ 1983 “ ‘confer[s] a general remedy for injuries to personal rights’ ” and that 
“ ‘§ 1983 claims are best characterized as personal injury actions.’ ” Id. at 240 
(citations omitted). See Goodman v. Lukens Steel Co., 482 U.S. 656 (1987) (a 
violation of § 1981 is a “tort-type” injury for purposes of determining which

(continued...)

- 26 -



B. Title V n  back pay awards are damages within the 
meaning of section 104(a)(2).

Section 104(a)(2) excludes “any damages” from gross 
income. The regulations specify that “[t]he term ‘damages 
received’ ” means “an amount received . . . through prosecu­
tion of a legal suit or action based upon tort or tort-type rights, 
or through a settlement agreement.” Treas. Reg. § 1.104-1(c).

One court has held that an award of back pay received 
through the prosecution of a Title VII action, being an equit­
able remedy, is not “damages” within the meaning of 
§ 104(a)(2). Sparrow v. Commissioner, 1991 U.S. App. LEXIS 
27991 (D.C. Cir. Nov. 26, 1991). In construing § 104(a)(2), 
however, the Commissioner’s regulations define the term 
“damages” to include “an amount” received on account of per­
sonal injuries, apparently eliminating any distinction between 
damages in equity and at law.“ Treas. Reg. § 1.104-l(c) 
(emphasis added). The plain meaning of the term “damages” 
also does not support a distinction between legal and equitable 
relief. See Black’s Law Dictionary 351 (5th ed. 1979) (“a 
pecuniary compensation . . . which may be recovered in the 
courts”). The structure of § 104(a) also belies any distinction 
between equitable and legal damages. Excludability turns on 
the source of the amounts received, not their nature. See 
I.R.C. § 104(a)(1) (“amounts received under workmen’s com­
pensation”); id. at § 104(a)(3) (“amounts received through 
accident or health insurance”); id. at § 104(a)(4) (“amounts 
received as a pension [or] annuity”); id. at § 104(a)(5) (“a- 
mounts received . . .  as disability income”).

24.(...continued)
state statute of limitations applies). Similarly, Title VII claims seek relief for 
injuries resulting from discrimination -  personal injuries for purposes of 
§ 104(a)(2). Metzger, 88 T.C. 834 (claims under §§ 1981 and 1983 and 
Title VII are actions for a personal injury).

2.5. This issue is discussed at greater length in respondents’ brief.

- 27 -



Other provisions of the Code explicitly refer to equitable 
and legal actions when appropriate. See, e.g., I.R.C. § 6305(b) 
(1989) (removing from jurisdiction of United States courts “any 
action, whether legal or equitable” brought to review certain tax 
collections). Absent any evidence to the contrary, the plain 
meaning of the term “damages” should prevail and, therefore, 
§ 104(a)(2) applies to back pay awards under Title VII despite 
their equitable nature. Escondido Mutual Water Co. v. LaJolla 
Band o f Mission Indians, 466 U.S. 765, 772 (1984) (“[sjince it 
should be generally assumed that Congress expresses its 
purposes through the ordinary meaning of the words it uses, we 
have often stated that ‘[ajbsent a clearly expressed legislative 
intention to the contrary, [statutory] language must ordinarily be 
regarded as conclusive’ ”) (citations omitted).

CONCLUSION

The opinion of the Sixth Circuit Court of Appeals should 
be affirmed.

Respectfully submitted,

C. Cabell Chinnis, Jr .
(Counsel of Record)

Elahna R. Strom 
Philip L. Gordon 
Elizabeth B. Dixon 
Julie E. Barland 
LATHAM & WATKINS 
1001 Pennsylvania Avenue, N.W. 
Washington, D.C. 20004 
(202) 637-2200

28



Steven R. Shapiro 
Isabelle Katz Pinzler 
AMERICAN CIVIL 
LIBERTIES UNION 
FOUNDATION 

132 West 43 Street 
New York, New York 10036 
(212) 944-9800

Alison C. Wetherfield 
Martha F. Davis 
NOW LEGAL DEFENSE 
AND EDUCATION 
FUND

99 Hudson Street
New York, New York 10013
(212) 925-6635

Julius L. Chambers 
Charles Stephen Ralston 
NAACP LEGAL DEFENSE 
AND EDUCATIONAL 
FUND, INC.

99 Hudson Street
New York, New York 10013
(212) 219-1900

Dated: December 20, 1991

29



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