Outten & Golden: Empowering Employees in the Workplace

Tax Relief Measure Passes Senate

May 16th, 2003 | Paula Brantner

Last night (5/15), after the usual amount of philosophical amendments and long-winded debate, the Senate passed its tax package, S 1054, the Jobs and Growth Tax Relief Reconciliation Act of 2003, on a 51-49 vote, mostly but not strictly along party lines. (See S 1054 Vote for more information.) While the passage of this measure is significant for many reasons, because of the tax breaks that will affect most if not all taxpayers, it is especially significant for workers, as the final package passed by the Senate contains one of the reforms that is part of the Civil Rights Tax Relief Act (House version/Senate version).

Section 521 of the Senate bill contains a provision that will eliminate the double taxation of attorneys fees in employment discrimination and civil rights cases. (If this search doesn’t work, go to the Thomas web site and search by the bill number, S 1054. The CRTRA provision is sect. 521). This provision was previously inserted in the bill during the Senate Finance Committee’s markup of the bill, and remained intact at the conclusion of the vote by the full Senate to ratify its tax relief package. The Senate provision would allow plaintiffs incurring legal fees in discrimination cases to take an “above-the-line” deduction of the legal fees. This puts attorneys fees on the same footing as other business expenses that are fully deductible (dollar-for-dollar) from income, rather than subject to various limitations that “below-the-line” miscellaneous itemized deductions face, including the alternative minimum tax, the 2% floor, and phaseouts at higher income levels–all of which often mean that only a very small amount of attorneys fees is now deductible. For more information on this topic, see WF’s fair taxes page.

Also added as an amendment to the Senate package is another provision which will assist some workers who litigate discrimination and civil rights cases. Sen. Orrin Hatch (R-UT) submitted an amendment (No. 627) affecting the taxation of punitive damage awards. In the same 1996 change in the law that made emotional distress damages taxable (see WF’s fair taxes page for further information), punitive damages were also made taxable. However, under the laws in some states, which Hatch’s amendment refers to as “split-award statutes,” those who win punitive damages are required to give a certain fixed percentage of that award to the state, rather than keeping the amount themselves once they receive a judgment. The Hatch amendment would prevent plaintiffs from being taxed on the amount of the award that goes to the state, as well as on the portion of attorneys fees attributable to that share of the award. Like the provision discussed above, this amendment would prevent plaintiffs from being taxed on money that they never see and is theirs in name only. However, it will only apply to a very small number of people, as virtually no settled cases involve punitive damages (defendants generally do not admit fault when cases are settled), and many of the cases where punitives are initially awarded by a jury are ultimately settled on appeal without punitives. This amendment passed as a unanimous consent measure (deemed uncontroversial), not subject to a separate vote.

Despite the excitement about having these provisions for the first time in a bill passed by the Senate, the bill is not perfect. For those who have cases pending, there is one aspect of the provision that is very important for you to know about. The Senate provision would only apply to awards received after the date of enactment. The specific language reads as follows:

The amendments made by this section shall apply to fees and costs paid after the date of the enactment of this Act with respect to any judgment or settlement occurring after such date.

This means, that until it is more clear whether or not the measure will pass this year, you may wish to delay receipt of any award you would otherwise receive while the bill is pending, if at all possible. (You should, of course, consult with your attorney immediately for further information.) Otherwise, any award containing attorneys fees that you receive before the bill becomes effective would be subject to being taxed, when receiving the award later could help you avoid paying taxes on the attorneys fees. We will continue to report new developments here, as will NELA at its web site.

Now that the Senate bill has passed, it must be reconciled with the version of the bill passed by the House of Representatives, which does not contain the CRTRA and punitive damages provisions. At this point, the two houses would typically work to resolve the key differences between the two bills in a conference committee. However, the House may be balking, due to major philosophical differences with the Senate approach, and may not cooperate at this point with the Senate in conferring on the bill. (See Detroit Free Press article.) Thus it remains to be seen whether the conference process will start any time soon, despite President Bush’s desire to pass tax relief by Memorial Day. (See Washington Post article.)

Everyone should now be contacting key players on the House Ways & Means Committee as well as the Senate conferees (see lists below) to ensure that the bill which ultimately emerges includes this provision and has an effective date that covers all settlements and awards after 12/31/02. This may be the most realistic date we can hope for.

Republican CRTRA supporters on the Ways and Means Committee:

Nancy Johnson (CT)

Amory Houghton (NY)

Mark Foley (FL)

Phil Crane (IL)

Phil English (PA)

Republican Ways and Means Committee Members who have been CRTRA co-sponsors in the past:

Jim Ramstad (MN)

Jennifer Dunn (WA)

Scott McInnis (CO)

Republicans in leadership positions in the House who are CRTRA co-sponsors:

Principal House Sponsor Rep. Deborah Pryce (OH)

F. James Sensenbrenner (WI)

Tom Davis (VA)

Senate Conferees:

Charles E. Grassley (IA)

Orrin Hatch (UT)

Don Nickles (OK)

Trent Lott (MS)

Max Baucus (MT)

John D. Rockefeller (WV)

John Breaux (LA)

If you are from any of these states, it is especially important that you let these Members of Congress TODAY know that this is an important issue and that their support is imperative. Please visit the Workplace Fairness Action Center today, and respond to one of the action alerts listed below: Stop Taxing Discrimination Awards Unfairly! (for those not currently involved in a civil rights lawsuit); or our second alert especially designed for Current Plaintiffs in Civil Rights Cases. We’re farther along than ever, but we still have a long ways to go, so please help us today!

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