No. 94-500

In the Supreme Court of the United States

OCTOBER TERM, 1994

COMMISSIONER OF INTERNAL REVENUE, PETITIONER

v.

ERICH E. AND HELEN B. SCHLEIER

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

BRIEF FOR THE PETITIONER

DREW S. DAYS, III
Solicitor General

LORETTA C. ARGRETT
Assistant Attorney General

LAWRENCE G. WALLACE
Deputy Solicitor General

KENT L. JONES
Assistant to the Solicitor General

ANN B. DURNEY
EDWARD T. PERELMUTER
Attorneys

Department of Justice
Washington, D.C. 20530
(202)514-2217 

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QUESTION PRESENTED

Whether back pay and liquidated damages received
in settlement of litigation under the Age Discrimina-
tion in Employment Act of 1967 are excluded from
gross income under Section 104 (a) (2) of the Internal
Revenue Code as "damages received * * * on ac-
count of personal injuries or sickness" (26 U.S.C.
l04(a) (2)).

(I)

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TABLE OF CONTENTS

Page

Opinions below . . . . 1
Jurisdiction . . . . 1
Statutory and regulatory provisions involved  . . . . 2
Statement . . . . 3
Summary of argument . . . . 9
Argument:
Back pay and liquidated damages received in settle-
ment of litigation under the Age Discrimination in
Employment Act of 1967 are not excluded from
gross income under Section 104 (a) (2) of the In-
ternal Revenue Code as "damages received * * * on
account of personal injuries or sickness" . . . . 11
A. Section 104 (a) (2) authorizes an exclusion from
income only for damages received on account of
personal injuries or sickness . . . . 12
B. Back pay and liquidated damages awarded under
the ADEA do not represent damages received on
account of personal injuries . . . . 17
C. Liquidated damages under the ADEA are not
excluded from income under Section 104 (a) (2)
for the additional reason that they are awarded
"on account of" the defendant's willful miscon-
duct rather than "on account of" the taxpayer's
personal injury . . . . 25
Conclusion . . . . 35
     
TABLE OF AUTHORITIES

Cases:

Albemarle Paper Co. v. Moody, 422 U.S. 405
(1975) . . . . 6, 13 
Brooklyn Savings Bank v. O'Neil, 324 U.S. 697
(1945) . . . . 20, 22
       
(III)

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IV

Cases-Continued:

Page

Castle v. Sangamo Weston, Inc., 837 F.2d 1550
(11th Cir. 1988) . . . . 18
City of Newport v. Fact Concerts, Inc., 453 U.S. 
247 (1981) . . . . 23, 25
Commissioner v. Glenshaw Glass Co., 348 U.S. 426
(1955) . . . . 11, 31, 32
Commissioner v. Jacobson, 336 U.S. 28 (1949) . . . . 16,28
Commissioner v. Miller, 914 F.2d 586 (4th Cir.
1990) . . . . 5, 26, 27, 28, 32
Downey v. Commissioner:
97 T.C. 150 (1991), Supp. op., 100 T.C. 634
(1993), rev'd, 33 F.3d 836 (7th Cir. 1994),
petition for cert. pending, No. 94-999 . . . . 4
33 F.3d 836 (7th Cir. 1994), petition for cert.
pending, No. 94-999 . . . . 8, 17
Fariss v. Lynchburg Foundry, 769 F.2d 958 (4th
Cir. 1985) . . . . 20 
Gertz v. Robert Welch, Inc., 418 U.S. 323 (1974) . . . . 15
Guthrie v. J.C. Penney Co., 803 F.2d 202 (5th Cir.
1986) . . . . 19
Hansard v. Pepsi-Cola Metropolitan Bottling Co.,
865 F.2d 1461 (5th Cir.), cert. denied, 493 U.S.
842 (1989) . . . . 18
Haskell v. Kaman Corp., 743 F.2d 113 (2d Cir.
1984) . . . . 18, 19
Hawkins v. United States, 30 F.3d 1077 (9th Cir.
1994), petition for cert. pending, No. 94-1041. . . . 26, 27,
28, 29, 32, 34
Higgins v. Smith, 308 U.S. 473 (1940) . . . . 34
Hill v. Spiegel, Inc., 708 F.2d 233 (6th Cir. 1983) . . . . 19
Horton v. Commissioner, 33 F.3d 625 (6th Cir.
1994) . . . . 27
INS v. National Center for Immigrants' Rights,
Inc., 112 S. Ct. 551 (1991) . . . . 29
International Brotherhood of Electric Workers v.
Foust, 442 U.S. 42 (1979) . . . . 23
Jones & Laughlin Steel Corp. v. Pfeifer, 462 U.S.
523 (1983) . . . . 14
Kolb v. Goldring, Inc., 694 F.2d 869 (1st Cir.
1982) . . . . 18

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V

Cases-Continued:              

Page

Kossman V. Calumet County, 849 F.2d 1027 (7th
Cir. 1988) . . . . 20
Lorillard v. Pens, 434 U.S. 575 (1978) . . . . 18, 21
Mead Corp. v. Tilley, 490 U.S. 714 (1989) . . . . 29
Overnight Motor Transportation Co. v. Missel, 316
U.S. 572 (1942) . . . . 20, 22
Pfeiffer v. Essex Wire Corp., 682 F.2d 684 (7th
Cir.), cert. denied, 459 U.S. 1039 (1982) . . . . 19
Pistillo v. Commissioner, 912 F.2d 145 (6th Cir.
1990) . . . . 5
Purcell v. Seguin State Bank & Trust Co., 999 F.2d
950 (5th Cir. 1993) . . . . 7
Rainwater v. United States, 356 U.S. 590 (1958 ) . . . . 34
Reese v. United States, 24 F.3d 228 (Fed. Cir.
1994) . . . . 26, 27, 28, 29, 30, 31
Rex Trailer Co. v. United States, 350 U.S. 148
(1956) . . . . 21
Rickel v. Commissioner, 900 F.2d 655 (3d Cir..
1990) . . . . 5
Roemer v. Commissioner, 716 F.2d 693 (9th Cir.
1983) . . . . 27
Schmitz v. Commissioner, 34 F.3d 790 (9th Cir.
1994), petition for cert. pending, No. 94-944 . . . . 8, 9, 20,
21, 25
Seay v. Commissioner, 58 T.C. 32 (1972) . . . . 12
Smith v. OPM, 778 F.2d 258 (5th Cir. 1985), cert.
denied, 476 U.S. 1105 (1986) . . . . 19
Starrels v. Commissioner, 304 F.2d 574 (9th Cir.
1962) . . . . 32
Thompson v. Commissioner, 866 F.2d 709 (4th Cir.
1989) . . . . 26
Trans World Airlines, Inc. v. Thurston, 469 U.S.
111 (1985) . . . . 18, 20, 22, 23, 24, 25, 26, 35
United States v. Burke, 112 S. Ct. 1867 (1992) . . . . passim
United States v. Centennial Savings Bank, 499
U.S. 573 (1991) . . . . 12, 16, 28
United States v. Price, 361 U.S. 304 (1960) . . . . 34
United States Trust Co. v. Helvering, 307 U.S. 57
(1939) . . . . 34
Vicksburg & Meridian R.R. v. Putnam, 118 U.S.
545 (1886) . . . . 14

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VI

Statutes and regulation:            

Page

Act of May 14, 1947, ch. 52, 11, 61 Stat. 89 . . . . 22
Age Discrimination in Employment Act of 1967,
29 U.S.C. 621 et seq.:
29 U.S.C. 623 (a) (1) . . . . 3
29 U.S.C. 626 (b) . . . . 3, 17, 19, 23
29 U.S.C. 633a . . . . 19
Americans with Disabilities Act of 1990, Pub. L.
No. 101-336, 104 Stat. 327 . . . . 16
Civil Rights Act of 1964, Tit. VII, 42 U.S.C. 2000e
et seq . . . . 6, 13, 14, 15, 16, 18, 19, 21
Equal Pay Act of 1963, 29 U.S.C. 206 . . . . 26
Fair Labor Standards Act of 1938, 29 U.S.C. 201
et seq . . . . 14, 18, 20, 22, 23, 26
29 U.S.C. 216 (b) . . . . 3, 17, 19
29 U.S.C. 217 . . . . 3, 17
29 U.S.C. 260  . . . . 22, 26
Internal Revenue Code (26 U.S.C.):
61 (a) . . . . 2, 11
104 (a) (1988 & Supp. V 1993) . . . . 2, 32
104 (a) (1) . . . . 29
104 (a) (1)-(5) . . . . 29
104 (a) (2) . . . . passim
104 (a) (3) . . . . 29
104 (a) (4) . . . . 29
104 (a) (5) . . . . 29
6512 (b) . . . . 4
Revenue Act of 1918, ch. 18, 213 (b) (6), 40 Stat.
1066 (1919) . . . . 12,30
Revenue Reconciliation Act of 1989, Pub. L. No.
101-239, Tit. VII, 7641 (a), 103 Stat. 2379 . . . . 32, 33
42 U.S.C. 1981 (Supp. IV 1992) . . . . 16
Treas. Reg. (26 C. F.R.):
1.104-1 (c) . . . . 2, 14, 15

Miscellaneous:

1 B. Bittker, Federal Taxation of Income, Estates
and Gifts (1981) . . . . 32
1972-2 C.B. 3 . . . . 12

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VII

Miscellaneous-Continued:           

Page

113 Cong. Rec. 7076 (1967) . . . . 23
D. Dobbs, Remedies (1973) . . . . 14, 15
3 L. Frumer & M. Friedman, Personal Injury
(1991) . . . . 14
H.R. 3299, 101st Cong., 1st Sess. (1989) . . . . 33
H.R. Rep. No. 247, 101st Cong., 1st Sess. (1989 ) . . . . 33
Kahn, Taxation of Punitive Damages Obtained in
a Personal Injury Claim, 65 Tax Notes 487
(1994) . . . . 33
Restatement (Second) of the Law of Contracts
(1981) . . . . 21
Rev. Rul. 72-268, 1972-1 C.B. 313 . . . . 14
Rev. Rul. 72-341, 1972-2 C.B. 32 . . . . 14
Rev. Rul. 74-77, 1974-1 C.B. 33 . . . . 12
Rev. Rul. 75-45,1975-1 C.B. 47 . . . . 27
Rev. Rul. 84-108, 1984-2 C.B. 32 . . . . 27
Rev. Rul. 85-98,1985-2 C.B. 51 . . . . 27
Rev. Rul. 93-88, 1993-2 C.B. 61 . . . . 16, 17
Sol. Mem. 1384,2 C.B. 71 (1920) . . . . 12
Sol. Op. 132, I-1 C.B. 92 (1922) . . . . 12
2 S. Speiser, C. Krause & A. Gans, The American
Law of Torts (1985) . . . . 14

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In the Supreme Court of the United States
      
OCTOBER TERM, 1994

No. 94-500

COMMISSIONER OF INTERNAL REVENUE, PETITIONER

v.

ERICH E. AND HELEN B. SCHLEIER

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

BRIEF FOR THE PETITIONER

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. 68a-
69a) is unpublished, but the decision is noted at 26
F.3d 1119 (Table). The opinion of the Tax Court
(Pet. App. 64a-65a) is unreported.

JURISDICTION

The judgment of the court of appeals was entered
on June 21, 1994. The petition for a writ of certiorari
was filed on September 19, 1994, and was granted on

(1)

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2

November 14, 1994. The jurisdiction of this Court
rests upon 28 U.S.C. 1254(1).

STATUTORY AND
REGULATORY PROVISIONS INVOLVED

1. Section 61(a) of the Internal Revenue Code,
26 U.S.C. 61(a), provides in relevant part:

Except as otherwise provided in this subtitle,
gross income means, all income from whatever
source derived.

2. Section 104(a) of the Internal Revenue Code,
26 U.S.C. 104(a) ( 1988 & Supp. V 1993), provides
in relevant part:

Except in the case of amounts attributable to .
(and not in excess of) deductions allowed under
section 213 (relating to medical, etc., expenses)
for any prior taxable year, gross 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;
      
*    *    *    *    *

3. Section 104-1 (c) of the Treasury Regulations,
26 C.F.R. 1.104-1(c), provides:

Section 104 (a) (2) [of the Internal Revenue
Code] excludes from gross income the amount of
any damages received (whether by suit or agree-
ment) on account of personal injuries or sick-
ness. 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

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3

tort or tort type rights, or through a settlement
agreement entered into in lieu of such prosecu-
tion.     

STATEMENT

1. Respondent Erich E. Schleier is a former em-
ployee of United Airlines, Inc. 1. Pursuant to an estab-
lished policy of United Airlines, respondent's employ-
ment was terminated when he reached the age of
sixty (Tax Ct. Pet. 2-3 ). Respondent thereafter filed
a complaint in federal district court alleging that his
termination violated the Age Discrimination in Em-
ployment Act of 1967 (ADEA), which (with ex-
ceptions not relevant here ) makes it "unlawful
for an employer * * * to discharge any individual
* * * because of such individual's age" (29. U.S.C.
623 (a) (1) ). The remedies for an unlawful discharge
under the ADEA include reinstatement, back pay,
injunctive and declaratory relief and attorneys fees.
See 29 U.S.C. 626(b) ; 29 U.S.C. 216(b), 217. The
ADEA also authorizes an additional award of "liqui-
dated damages" in  an amount equal to the backpay
award "in cases of willful violations" of that Act.
29 U.S.C. 626(b).
Respondent's complaint was consolidated within a
class action suit against United Airlines. On June
30, 1986, the class action was settled under an agree-
ment providing for monetary payments to the class
members. One half of the settlement payment was
attributed to "back pay"; the other half of the pay-
ment was attributed to "liquidated damages." As a
result of the settlement, respondent received "back

___________________(footnotes)

1 Respondent's wife Helen is a party to this case solely
because the couple filed a joint return during the year in
question.

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4

pay" of $72,814.50 and "liquidated damages" in the
same amount (Tax Ct. Pet. 4-5 ).
Respondent reported the "back pay" as income on
his 1986 tax return. He did not, however, report the
"liquidated damages" that he received under the set-
tlement. The Commissioner of Internal Revenue is-
sued a notice of deficiency to respondent, asserting
that the liquidated damages were improperly excluded
from his income, resulting in a deficiency of $35,918.50
in respondent's income tax for 1986 (Tax Ct. Pet. 2).
2. Respondent commenced this case in Tax Court
to obtain a redetermination of the asserted deficiency.
The petition alleged that the liquidated damages por-
tion of the settlement payment was properly excluded
from gross income under Section 104 (a) (2) of the
Internal Revenue Code, which provides that "gross
income does not include" (26 U.S.C. 104(a) (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.

The petition further alleged that the "back pay" por-
tion of the settlement payment, which had been re-
ported as income on respondent's 1986 return, was
also excludable from gross income under Section
104 (a) (2). Respondent therefore sought a determi-
nation of overpayment (as authorized by 26 U.S.C.
6512(b)).
a. Proceedings on respondent's case were deferred
pending the Tax Court's disposition of the lead case
relating to the United Airlines class action settle-
ment, Downey v. Commissioner, 97 T.C. 150 ( 1991),
supplemental opinion, 100 T.C. 634 (1993), rev'd, 33
F.3d 836 (7th Cir. 1994), petition for cert. pending,
No. 94-999 (filed Dec. 5, 1994).

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5

In its original opinion in Downey, the Tax Court
(in a reviewed opinion with six judges dissenting in
part) held that back pay and liquidated damages re-
ceived under the ADEA are excludable from gross
income under Section 104 (a) (2). With respect to
back pay, the Tax Court expressly adopted (Pet. App.
21a-24a ) the reasoning of Rickel v. Commissioner,
900 F.2d 655 (3d Cir. 1990), and Pistillo v. Commis-
sioner, 912 F.2d 145 (6th Cir. 1990), which held that
backpay awards under the ADEA are excludable
from gross income because (i) an ADEA suit alleges
a violation of duty that arises by operation of a stat-
ute and not by virtue of a contract and (ii) statutes
addressing discrimination in the workplace had been
characterized by other courts as involving personal
injury. 900 F.2d at 662-663; 912 F.2d at 149-150.
With respect to liquidated damages, the Tax Court
in Downey rejected the Commissioner's contention
that ADEA liquidated damages-like punitive dam-
ages-are paid because of the employer's willful mis-
conduct, rather than "on account of personal injuries"
(26 U.S.C. 104 (a) (2)) to the employee, and are
therefore not excludable from gross income under the
plain language of the statute. Pet. App. 26a. See
Commissioner v. Miller, 914 F.2d 586, 589-591 (4th
Cir. 1990). The Tax Court held that, while ADEA
liquidated damages serve a punitive purpose, these
damages, when viewed from the victim's perspective,
represent compensation for nonpecuniary losses. Pet.
App. 26a-29a.
b. The Tax Court withheld entry of its final deci-
sion in Downey pending this Court's decision in
United States v. Burke, 112 S. Ct. 1867 (1992). In
Burke, this Court held that backpay awards received
in settlement of litigation under the pre-1991 version

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6

of Title VII of the Civil Rights Act of 1964 are not ex-
cludable from gross income under Section 104 (a) (2).
In reaching that conclusion, the Court emphasized
that a statute "whose sole remedial focus is the award
of backwages" (112 S. Ct. at 1874) does not represent
a tort-like remedy of a personal injury but instead
represents redress for "legal injuries of an economic
character" (id. at 1873, quoting Albemarle Paper Co.
v. Moody, 422 U.S. 405, 418 (1975) ). The Court
concluded that a backpay remedy that redresses an
economic injury is "not excludable from gross income
as 'damages received . . . on account of personal in-
juries' under 104(a) (2)." 112 S. Ct. at 1874.
After this Court issued its decision in Burke, the
Tax Court granted the Commissioner's motion for
reconsideration of the Downey decision. In a supple-
mental opinion in Downey (with several separate
opinions), the Tax Court emphasized that one of the
hallmarks of tort liability is the availability of a
broad range of damages to compensate the victim, as
well as punitive damages when the defendant's con-
duct was intentional or reckless. Pet. App. 42a. The
Tax Court observed that in contrast to the pre-1991
version of Title VII involved in Burke (which limited
the available remedies to back pay and equitable re-
lief, see 112 S. Ct. at 1872-1874 & nn.8, 12), the
ADEA provides "a range of remedies, including both
unpaid wages and 'liquidated damages.'" Pet. App.
44a. The Tax Court concluded that the ADEA "evi-
dences a tort-like conception of injury and remedy"
because liquidated damages under the ADEA com-
pensate the victim of age discrimination for non-
pecuniary losses and also serve a deterrent or puni-
tive purpose. Id. at 45a. The Tax Court therefore
reaffirmed its prior holding in Downey that all dam-

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7

ages received in ADEA litigation are excludable from
gross income under Section 104 (a) (2). Pet. App.
45a. On July 7, 1993, the Tax Court entered an order
in the present case granting respondent's motion for
summary judgment based on the court's ruling in
Downey. Pet. App. 64a-65a.
3. The Commissioner appealed from the Tax
Court's ruling in this case and in Downey. While
these appeals were pending, the Fifth Circuit en-
dorsed and adopted the Tax Court's decision in
Downey in the course of addressing a damages issue
in private ADEA litigation in which the United
States was not a party and did not participate.
Purcell v. Sequin State Bank & Trust Co., 999 F.2d
950. 961 (1993 ). 2. The court in Purcell agreed with
the Tax Court's reasoning that "ADEA claims are
tort-like and that an entire ADEA award is non-
taxable." Ibid.
a. Because the Fifth Circuit had recently endorsed
the Tax Court's Downey decision in Purcell, the Com-
missioner filed a suggestion that the appeal in re-
spondent's case be heard en bane. The Fifth Circuit
rejected that suggestion. Pet. App. 67a. The three-
judge panel assigned to this case then entered a deci-
sion in favor of respondent solely on the authority of
Purcell. Pet. App. 68a-69a.
b. On the Commissioner's appeal from the Downey
decision, the Seventh Circuit reversed the Tax

___________________(footnotes)

2 In Purcell, the court concluded that an ADEA backpay
award should not be increased to take account of the em-
ployee's income tax liabilities because, under the Tax Court's
ruling in Downey, the ADEA award would not be subject to
tax under Section 104 (a) (2) of the Code. See 999 F.2d at
961.

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8

Court, holding that ADEA backpay and liquidated
damages awards are not excluded from income under
Section 104 (a) (2). Downey v. Commissioner, 33
F.3d 836, petition for cert. pending, No. 94-999 (filed
Dec. 5, 1994). The Seventh Circuit reasoned that
(33 F.3d at 839) :

Burke stands for the proposition that a federal
anti-discrimination statute must provide compen-
satory damages for intangible elements of per-
sonal injury (such as pain and suffering, emo-
tional distress, or personal humiliation) to con-
stitute a tort-type personal injury and receive
tax-exempt treatment under  104(a) (2).

The court noted that the only damages remedies under
the ADEA are back pay and liquidated damages and
that neither of these remedies "compensate for the
intangible elements of a personal in jury." 33 F.3d at
840. Because the limited remedies available under
the ADEA thus lack "an essential element of a tort-
type claim," the Seventh Circuit concluded that,
under this Court's analysis in Burke, the damages
awarded under the statute "cannot be excluded from
taxation under  104(a) (2) ." 33 F.3d at 840.
c. In an appeal involving a different party to the
United Airlines settlement, the Ninth Circuit affirmed
a Tax Court decision based upon Downey. Schmitz v.
Commissioner, 34 F.3d 790 (1994), petition for cert.
pending, No. 94-944 (filed Nov. 23, 1994). In
Schmitz, the Ninth Circuit agreed with the Tax Court
that the ADEA represents a "tort-like" cause of ac-
tion, reasoning that the "ADEA's liquidated damages
provision, as well as its provision for jury trials, dis-
tinguishes ADEA from the statute discussed in
Burke." 34 F.3d at 793. The court of appeals con-

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9

eluded that ADEA recoveries are therefore excluded
from tax under Section 104 (a) (2).
In Schmitz, the Ninth Circuit also rejected the
Commissioner's additional contention that, if ADEA
represents a "tort-type" recovery for a personal in-
jury, the liquidated damages component of that recov-
ery would be subject to tax in any event because it
does not represent an award "on account of personal
injuries" (26 U.S.C. 104(a)(2)) but is instead a
penalty "on account of" the employer's willful mis-
conduct. 34 F.3d at 794-796. The court stated that
liquidated damages under the ADEA are compensa-
tory rather than punitive-because they are designed
to "compensate victims for damages which are too
obscure and difficult to prove" (id. at 794) -and are
therefore excluded from tax under Section 104 (a) (2).

SUMMARY OF ARGUMENT

Section 104 (a) (2) of the Internal Revenue Code
provides that gross income does not include "the
amount of any damages received (whether by suit or
agreement * * *) on account of personal injuries or
sickness. " In United States v. Burke, 112 S. Ct. 1867
(1992), this Court held that Section 104(a) (2) ap-
plies only when the underlying cause of action that
led to the taxpayer's recovery provides compensation
for the "personal," as well as "economic," components
of the taxpayer's injury. The Court concluded that a
cause of action that does not compensate for the tradi-
tional harms associated with personal injuries-such
as pain and suffering, emotional distress, and harm to
reputation-does not yield "damages * * * on account
of personal injuries" within the exclusion from gross
income provided by Section 104(a) (2).

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10

The interpretation of Section 104(a) (2) adopted
by the Court in United States v. Burke governs, and
disposes of, the issues in this case. Even though dis-
crimination based upon age can effect "personal" in-
juries, back pay awarded under the ADEA provides
compensation only for the economic, and not the per-
sonal, components of that injury. The ADEA pro-
vides no remedy for the traditional harms associated
with a "personal in jury," such as pain and suffering,
emotional distress and harm to reputation. The award
of back pay under the ADEA thus does not compen-
sate for "damages * * * on account of personal
injuries" under this Court's decision in Burke.
The availability of liquidated damages under the
ADEA does not alter this result for two reasons.
First, liquidated damages under the ADEA do not
compensate the employee for the traditional elements
of personal injury, such as pain and suffering and
emotional distress. Liquidated damages under the
ADEA are an enforcement mechanism to deter "will-
ful violations" of the Act; they are not available as,
and do not provide, compensation for the personal
elements of the employee's injury. The availability
of liquidated damages under the ADEA thus does
not convert the backpay award into "damages * * *
on account of personal injuries." Second, liquidated
damages cannot themselves be excluded from gross
income under Section 104 (a) (2) because such dam-
ages are awarded "on account of" the employer's will-
ful misconduct, not "on account of personal injuries."
Liquidated damages, like punitive damages in an
ordinary tort suit, are therefore not excluded from
gross income under the plain language of the statute.

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11

ARGUMENT

BACK PAY AND LIQUIDATED DAMAGES RECEIVED
IN SETTLEMENT OF LITIGATION UNDER THE AGE
DISCRIMINATION IN EMPLOYMENT ACT OF 1967
ARE NOT EXCLUDED FROM GROSS INCOME UN-
DER SECTION 104(a)(2) OF THE INTERNAL REVE-
NUE CODE AS "DAMAGES RECEIVED * * * ON
ACCOUNT OF PERSONAL INJURIES OR SICKNESS"

The first step in calculating taxable income under
the Internal Revenue Code is to determine the tax-
payer's "gross income." Section 61 (a) provides that,
subject to specific exclusions set forth elsewhere in
the Code, "gross income means all income from what-
ever source derived." This sweeping statutory defini-
tion broadly reflects the Legislature's intent to exert
the full measure of its taxing power. United States
v. Burke, 112 S. Ct. 1867, 1870 (1992). Any funds
or other "accessions to wealth" (Commissioner v.
Glenshaw Glass Co., 348 U.S. 426, 430-431 (1955))
received by a taxpayer represent "gross income" un-
less the taxpayer establishes that the income falls
within one of the specific exclusions created by other
sections of the Code.
It is not disputed that the payment received by
respondent in settlement of his age-discrimination
suit under the Age Discrimination in Employment
Act of 1967 (ADEA) represents an "accession to
wealth" that constitutes "gross income" within the
broad scope of Section 61 (a). The question presented
in this case is whether that payment is excluded from
"gross income" by Section 104 (a) (2) of the Code,
which provides that "gross income does not include
* * * the amount of any damages received (whether
by suit or agreement * * * ) on account of personal
injuries or sickness." 26 U.S.C. 104 (a) (2). As an

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12

exclusion from gross income, Section 104 (a) (2) is
to be narrowly construed. United States v. Centen-
nial Savings Bank, 499 U.S. 573, 583-584 (1991).
See also United States v. Burke, 112 S. Ct. at 1876
(Scalia, J., concurring); id. at 1878 (Souter, J.,
concurring).

A. Section 104(a)(2) Authorizes An Exclusion From In-
come Only For Damages Received On Account Of
Personal Injuries Or Sickness

The statutory phrase-''damages received * * *
on account of personal injuries''-is not explained
in the text of the statute or in its legislative history.
United States v. Burke, 112 S. Ct. at 1870. As this
Court has noted, the term "personal injuries" is
susceptible of more than one interpretation. See id.
at 1871-1872 n.6; id. at 1875 (Scalia, J., concur-
ring ). 3. In United States v. Burke, however, the

___________________(footnotes)

3 The lineage of Section 104(a) (2) is as ancient as the
modern income tax. The statute was first enacted as Section
213 (b) (6) of the Revenue Act of 1918, ch. 18, 40 Stat. 1066
(1919). The Internal Revenue Service originally interpreted
the statute to apply only to damages recovered in connection
with physical injuries. See Sol. Mere. 1384, 2 C.B. 71 (1920);
Sol. Op. 132, I-1 C.B. 92, 93 (1922). In 1972, however, the
Service acquiesced in the Tax Court's decision in Seay v. Com-
missioner, 58 T.C. 32 (1972), which held that damages from
nonphysical personal injuries are also excluded from gross in-
come under the statute. See 1972-2 C.B. 3. See also Rev. Rul.
74-77, 1974-1 C.B. 33 (compensation for alienation of affec-
tions excluded from gross income under the statute).
The origin of Section 104(a) (2), and the lengthy history
of its administration, are discussed in detail in the govern-
ment's brief in United States V. Burke, No. 91-42, at 10-15.
In Burke, the Court considered this history and concluded
that the statutory term "'personal injuries' encompasses, in
accord with common judicial parlance and conceptions, * * *

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13

Court reviewed the lengthy history of the statute and
its administration and adopted an interpretation of
Section 104 (a) (2) that governs, and disposes of, the
issues presented in this case.
1. In Burke, the Court held that an award of
back pay under the pre-1991 version of Title VII
of the Civil Rights Act did not constitute "damages
received * * * on account of personal injuries or
sickness." The Court did not doubt that discrimina-
tion in violation of Title VII effects a "personal"
injury (112 S. Ct. at 1873), for such discrimination
is "an invidious practice that causes grave harm to
its victims" (id. at 1872). The Court noted, how-
ever, that the" monetary remedy then available' under
Title VII was limited to back pay (id. at 1874 &
n. 12 ) and that the recovery obtained by the taxpayer
in Burke thus focused exclusively on "legal injuries
of an economic character." Id. at 1873, quoting
Albemarle Paper Co, v. Moody, 422 U.S. 405, 418
(1975 ). Since Section 104(a) (2) provides an ex-
clusion only for damages awarded "on account of
personal injuries," and since the taxpayer in Burke
had received no compensation for the "traditional
harms associated with personal injury, such as pain
and suffering, emotional distress, [and] harm to
reputation" (id. at 1873), the Court held that Sec-
tion 104 (a) (2) was not applicable.
The Court thus concluded in Burke that Section
104 (a) (2) applies only when the underlying cause
of action that led to the taxpayer's recovery provides
compensation for the "personal," as well as "eco-
nomic," components of the taxpayer's injury. 112

___________________(footnotes)

nonphysical injuries to the individual, such as those affecting
emotions, reputation, or character, as well [as physical in-
juries]." 112 S. Ct. at 1871 n.6.

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14

S. Ct. at 1874. A cause of action that does not com-
pensate for the traditional harms associated with
personal injuries-" such as pain and suffering, emo-
tional distress, [and] harm to reputation''-does not
yield "damages * * * on account of personal injur-
ies" within the exclusion from gross income provided
by Section 104(a) (2). 4.
2. The Court drew support for its interpretation
both from the language of the statute and from the
administrative practice under it. The Internal Rev-
enue Service has long interpreted Section 104 (a) (2)
to apply only to recoveries based upon "tort or tort
type" claims that compensate for personal, as well as
economic, injuries. See 26 C.F.R. 1.104-1 (c) ; Rev.
Rul. 72-341, 1972-2 C.B. 32 (back pay under pre-
1991 version of Title VII not excluded from income) ;
Rev. Rul. 72-268, 1972-1 C.B. 313 (overtime and
minimum wages awarded under Fair Labor Stand-
ards Act not excluded from income ). 5.

___________________(footnotes)

4 The availability of compensatory damages for intangible
elements of personal injury such as pain and suffering and
emotional distress is an essential characteristic of a personal
injury tort action. See Vicksburg & Meridian R.R. v. Putnam,
118 U.S. 545, 554 (1886); 3 L. Frumer & M. Friedman, Per-
sonal Injury $3.01, at 94 (1991); 2 S. Speiser, C. Krause &
A. Gans, The American Law of Torts 8:18, at 552 (1985).
Awards for pain and suffering are estimated to account for
72% of damages in personal injury litigation. Jones &
Laughlin Steel Corp. v. Pfeifer, 462 U.S. 523,552 n.35 (1983).
See also D. Dobbs, Remedies 530 (1973) ("emotional distress
is a strong element in the dignitary tort cases and accounts
for a substantial portion of the damages award").
5 In 1960, the Internal Revenue Service adopted regulations
that "linked identification of a personal injury for purposes
of  104 (a) (2) to traditional tort principles" (United States

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15

The Court noted in Burke that a claim based upon
"a 'dignitary' or nonphysical tort" permits recovery
"not only [of] any actual pecuniary loss (e.g., loss;
of business or customers), but for `impairment of
reputation and standing in the community, personal
humiliation, and mental anguish and suffering.'"
112 S. Ct. at 1871-1872, quoting Gertz v. Robert
Welch, Inc., 418 U.S. 323, 350 (1974). See also D.
Dobbs, Remedies 509 (1973) (with dignitary torts,
"though economic or physical loss may be associated
with the injury, the primary or usual concern is not
economic at all, but vindication of an intangible
right" ). The Court concluded that a legal claim that
provides no compensation for these intangible, per-
sonal elements of injury is not a "tort or tort type"
claim within the meaning of the regulation (112
S. Ct. at 1873) and that any resulting award based
on such a claim does not represent damages "on ac-
count of personal injuries" within the meaning of the
statute (id. at 1873-1874 ). 6.

___________________(footnotes)

v. Burke, 112 S. Ct. at 1870) by providing (26 C.F.R.
1.104-1 (c) ) :
The term "damages received (whether by suit or agree-
ment)" means an amount received * * * through prose
cution of a legal suit or action based upon tort or tort
type rights, or through a settlement agreement entered
into in lieu of such prosecution.
6 Justice Souter's concurring opinion reached the same con-
clusion by a different route. Justice Souter identified the
dispositive question in Burke to be whether the underlying
action "was one `based upon tort or tort type rights.' 26
C.F.R. 1.104-1 (c) (1991) ." 112 S. Ct. at 1877. He noted
that the limitation of recovery to back pay under the pre-
1991 version of Title VII reflected a "quintessentially * * *
contractual measure of damages" (ibid.) and thus departed
from the ordinary model of tort relief. Justice Souter con-

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16

The interpretation of Section 104 (a) (2) adopted
by the Court in Burke is supported by the language
of the statute and is consistent with the adminis-
trative practice. The Court's interpretation has the
further virtue of providing an administrable rule.
Following the decision in Burke, the Internal Rev-
enue Service concluded that recoveries under statu-
tory schemes (such as the post-1991 provisions of
Title VII) that provide compensation for the "tradi-
tional harms associated with personal injury, such as
pain and suffering, emotional distress, harm to repu-
tation, [and] other consequential damages" (112 S.
Ct. at 1873), are excluded from income by Section
104 (a) (2). See Rev. Rul. 93-88, 1993-2 C.B. 61. 7.

___________________(footnotes)

cluded that "the outcome in this case follows from the default
rule of statutory interpretation that exclusions from income
must be narrowly construed" (id. at 1878, citing United
States V. Centennial Savings Bank, 499 U.S. at 583; Commis-
sioner v. Jacobson, 336 U.S. 28, 49 (1949) ). Since "an acces-
sion to wealth is not to be held excluded from income unless
some provision of the Internal Revenue Code clearly so en-
tails," and since in Burke there was "no clear application of
26 U.S.C. 104 (a) (2), as interpreted by the Treasury Regu-
lation," Justice Souter concluded that the back pay received
by the taxpayer in that case was not excluded from income.
112 S. Ct. at 1878.

7 As the Court observed in United States V. Burke, 112
S. Ct. at 1874 n.12, the post-1991 provisions of Title VII
provide for a broad range of compensatory damages for
intangible elements of injury in disparate treatment cases.
Following Burke, the Service concluded that recoveries in
post-1991 Title VII disparate treatment cases-as well as
compensatory damages received under 42 U.S.C. 1981 (Supp.
IV 1992) and under the Americans with Disabilities Act-are
excluded from gross income under Section 104 (a) (2). Rev.
Rul. 93-88, 1993-2 C.B. 61, 63. The 1991 amendments to
Title VII did not, however, alter the remedies available in

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17

By contrast, statutory remedies that do not compen-
sate for the "traditional harms associated with per-
sonal injury" are not excluded from income under
the statute. Id. at 62-63.

B. Back Pay And Liquidated Damages Awarded Under
The ADEA Do Not Represent Damages Received On
Account Of Personal Injuries

The remedies for an unlawful discharge under the
ADEA include reinstatement, back pay, injunctive
and declaratory relief and attorneys fees. See 29
U.S.C. 626(b); 29 U.S.C. 216(b), 217. The ADEA
also authorizes an additional award of "liquidated
damages" in an amount equal to the backpay award
"in cases of willful violations" of that Act. 29 U.S.C.
626 (b). The back pay and liquidated damages re-
ceived by respondent under the ADEA do not com-
pensate for the "traditional harms associated with
personal injury, such as pain and suffering, emo-
tional distress, harm to reputation, [and] consequen-
tial damages" (United States v. Burke, 112 S. Ct. at
1873 ). ADEA back pay and liquidated damages
compensate for economic losses but provide no com-
pensation for the personal component of the victim's
injuries. They therefore do not represent damages
received "on account of personal injuries" and are
not excluded from income under Section 104 (a) (2).
1. Applying this Court's decision in Burke, the
Seventh Circuit properly concluded in Downey v.
Commissioner, 33 F.3d at 839, that back pay and

___________________(footnotes)

disparate impact cases from those available in Burke. The
Service accordingly ruled in Revenue Ruling 93-88 that back
pay received in disparate impact cases is not excluded from
gross income. 1993-2 C.B. at 63.

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18

liquidated damages received under the ADEA are not
excludable from gross income under Section 104
(a) (2). The remedial scheme of the ADEA, like
the remedial scheme of pre-1991 Title VII, focuses
on the economic loss, rather than the personal in-
jury, of the employee. See Castle v. Sangamo Wes-
ton, Inc., 837 F.2d 1550, 1561 (11th Cir. 1988);
Kolb v. Goldring, Inc., 694 F.2d 869, 872 (1st Cir.
1982 ). 8. The ADEA authorizes back pay, reinstate-
ment (as equitable relief ), front pay in lieu of rein-
statement, and liquidated damages for willful viola-
tions. See Hansard v. Pepsi-Cola Metropolitan Bot-
tling Co., 865 F.2d 1461, 1469 & n.3 (5th Cir.),
cert. denied, 493 U.S. 842 (1989). 9. The ADEA
does not, however, provide compensation for "tradi-
tional harms associated with personal injury, such
as pain and suffering, emotional distress, harm to
reputation, or other consequential damages" (United
States v. Burke, 112 S. Ct. at 1873). See, e.g.,
Haskell v. Kaman Corp., 743 F.2d 113, 120-121
& n.2 (2d Cir. 1984) ; Kolb v. Goldving, Inc., 694
F.2d at 872. Indeed, evidence of these intangible
elements of personal injury is not admissible in

___________________(footnotes)

8 The remedial provisions of the ADEA were modeled on,
but are not identical to, the remedial provisions of the Fair
Labor Standards Act. Trans World Airlines, Inc. v. Thurston,
469 U.S. 111, 125 (1985). See also Lorillard V. Pow, 434 U.S.
575 (1978); page 22, infra.
Under the ADEA, "[p]ain and suffering form no part of
the damages." Kolb V. Goldring, Inc., 694 F.2d at 872. "Un-
like the tort plaintiff, the plaintiff suing under the ADEA
may recover only `those pecuniary benefits connected to the
job relation' " and "[f]rom these must be subtracted post-
termination economic benefits." Ibid.

9 Front pay was also available under the pre-1991 version
of Title VII that was involved in United States V. Burke.
See 112 S. Ct. at 1873 n.9.

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19

ADEA litigation. Guthrie v. J.C. Penney Co., 803
F.2d 202, 208 (5th Cir. 1986) ; Haskell v. Kaman
Corp., 743 F.2d at 121; Hill v. Spiegel, Inc., 708 F.2d
233, 236 (6th Cir. 1983) ; Pfeiffer v. Essex Wire
Corp., 682 F.2d 684, 688 (7th Cir.), cert. denied, 459
U.S. 1039 (1982).
The only difference between the remedial scheme
provided by the pre-1991 version of Title VII in-
volved in Burke and the remedial scheme provided
by the ADEA is that victims of age discrimination
may recover "liquidated damages" equal to the back-
pay award under the ADEA when-but only when
-the employer has engaged in "willful" violations
of the statute (29 U.S.C. 626 (b)). 10. Liquidated
damages do not compensate for intangible, personal
injuries of the employee. Instead, liquidated dam-
ages may be awarded only in cases where the em-
ployee has suffered economic loss from an employer's
willful age discrimination. The amount of liquidated
damages awarded for "willful violations" of the
ADEA (29 U.S.C. 626(b)) is set, by statute, at an
amount "equal" to the backpay award (29 U.S.C.
216 (b) ). When an employee obtains only declara-
tory or equitable relief and does not recover back
pay, or when the employer's violation was not will-
ful, liquidated damages may not be awarded under
the ADEA even though the employee suffers a "per-

___________________(footnotes)

10 Federal employees may not recover liquidated damages
under the ADEA. 29 U.S.C. 633a; Smith v. OPM, 778 F.2d
258, 263 (5th Cir. 1985), cert. denied, 476 U.S. 1105 (1986).
The remedies provided to a federal employee under the ADEA
are thus identical to the remedies provided by the pre-1991
version of Title VII. Back pay received by federal employees
for age discrimination is therefore not excludable from gross
income under the precise holding of United States v. Burke.

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20

sonal" (as well as "economic") injury from the
discrimination (United States v. Burke, 112 S. Ct.
at 1873). See Kossman v. Calumet County, 849
F.2d 1027, 1029-1030 (7th Cir. 1988); Fariss v.
Lynchburg Foundry, 769 F.2d 958, 967 (4th Cir.
1985). Moreover, when an award of liquidated dam-
ages is available under the ADEA, its amount has
no relationship to the "personal injuries" endured by
the victim of discrimination. As this Court con-
cluded in Trans World Airlines, Inc. v. Thurston,
469 U.S. 111, 125-126 (1985), ADEA liquidated
damages, which are available only for "willful viola-
tions" of the Act, are not compensatory; they are
"punitive in nature" and function as an enforce-
ment mechanism to deter intentionally unlawful
conduct.
2. The Tax Court thus erred in this case in con-
cluding that liquidated damages under the ADEA
are compensatory and represent "only a substitute
for difficult to measure personal injuries resulting
from discriminatory employment" (Pet. App. 21a).
In reaching that conclusion, the Tax Court attempted
to distinguish (id. at 27a) this Court's conclusion in
Trans World Airlines that ADEA liquidated dam-
ages are "punitive in nature" (469 U.S. at 125).
The Tax Court reasoned that "the ADEA was
modeled in part" on the Fair Labor Standards Act
of 1938 (Pet. App. 28a) and that, under the FLSA,
this Court held in Brooklyn Savings Bank v. O'Neil,
324 U.S. 697, 707 (1945), and Overnight Motor
Transportation Co. v. Missel, 316 U.S. 572, 583-584
(1942), that FLSA liquidated damages represented
compensation for "damages too obscure and difficult
of proof" (Pet. App. 29a). In Schmitz v. Commis-
sioner, the Ninth Circuit adopted and applied the

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21

same reasoning as the Tax Court, relying on Brook-
lyn Savings Bank and Overnight Motor Transporta-
tion to conclude that ADEA liquidated damages are
not "solely punitive in nature" but are awarded "to
compensate victims for damages which are too ob-
scure and difficult to prove" (34 F.3d at 794). 11.
The Tax Court and the Ninth Circuit funda-
mentally erred in relying on Brooklyn Savings Bank
and Overnight Motor Transportation. Prior to 1947,
liquidated damages were awarded automatically
under the FLSA as additional compensation to every
employee whose employer failed to pay the minimum

___________________(footnotes)

11 The Ninth Circuit advanced one other reason in support
of its conclusion that ADEA recoveries are excluded from
tax under Section 104 (a) (2). The court noted that, unlike
the pre-1991 version of Title VII, jury trials are available
under the ADEA. The court of appeals suggested that this
fact "distinguishes ADEA from the statute discussed in
Burke" (34 F.3d at 793). It is true that ADEA litigants are
entitled to jury trials (Lorillard V. Pons, 434 U.S. 575 (1978))
and that, in Burke, this Court noted that jury trials were not
available under the pre-1991 version of Title VII. See 112
S. Ct. at 1872. But, while the lack of a right to a jury trial
may indicate that the remedy is not "tort type" in nature (see
id. at 1873), the availability y of a jury trial does not indicate
that the right is "tort type." At common law, jury trials
were available for contract, as well as tort, claims. Moreover,
"liquidated damages" are not a traditional tort remedy; in-
stead, they are an ordinary remedy for breach of contract.
See Rex Trailer Co. v. United States, 350 U.S. 148, 151
(1956); Restatement (Second) of the Law of Contracts
356 (1981).
In Burke, the Court held that the dispositive question under
Section 104 (a) (2) is whether the legal right compensates for
the personal, as well as economic, components of the taxpay-
er's injury. The parties' constitutional or statutory entitle-
ment to a jury trial has only a remote relationship to that
inquiry.

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22

wage. Overnight Motor Transportation Co. v. Mis-
sel, 316 U.S. at 581-584. Under the pre-1947 pro-
visions of the FLSA, liquidated damages in an
amount equal to unpaid minimum wages were
awarded without any showing that the employer had
"willfully," or in bad faith, violated that Act. Ibid.
It was in that statutory context that this Court
stated-in 1945 in Brooklyn Savings Bank and in
1942 in Overnight Motor Transportation-that FLSA
liquidated dam-ages were "not- penal in nature but
constitute [d] compensation for the retention of a
workman's pay which might result in damages too
obscure and difficult of proof for estimate other than
by liquidated damages." 324 U.S. at 707. See 316
U.S. at 583-584.
The FLSA was amended in 1947, however, to limit
the availability of liquidated damages under that Act
in situations where the employer had acted "in good
faith" and with "reasonable grounds for believing
that his act or omission was not a violation" of the
Act. 29 U.S.C. 260. See Act of May 14, 1947, ch.
52, 11, 61 Stat. 89. 12. When the ADEA was enacted

___________________(footnotes)

12 As the Court explained in Trans World Airlines, Inc. V.
Thurston, 469 U.S. at 128 n.22:

The Court interpreted the FLSA, as originally enacted,
as allowing the recovery of liquidated damages any time
that there was a violation of the Act. See Overnight
Motor Transportation Co. V. Missel, 316 U.S. 572 (1942).
In response to its dissatisfaction with that harsh inter-
pretation of the provision, Congress enacted the Portal-
to-Portal Act of 1947. See Lorillard V. Pens, 434 U.S.
575, 581-582, n.8 (1978). Section 11 of the PPA, 29
U.S.C. 260, provides the employer with a defense to a
mandatory award of liquidated damages when it can
show good faith and reasonable grounds for believing it
was not in violation of the FLSA.

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23

in 1967, and "modeled in part" on the then-existing
provisions of the FLSA (Pet. App. 28a), the avail
ability of liquidated damages was further expressly
limited to those situations where the employer has
"willfully" violated the ADEA. 29 U.S.C. 626 (b)
It was in this context that this Court correctly con
eluded in 1985 in Trans World Airlines, Inc. v
Thurston that ADEA liquidated damages are "puni
tive in nature" (469 U.S. at 125) and are designed
to "furnish an effective deterrent to willful viola
tions" of that Act. Ibid., quoting 113 Cong. Rec
7076 ( 1967) ( Sen. Javits ). Although mandatory
liquidated damages available to every injured party
serve a compensatory function, liquidated damages
available only for "willful violations" of the Act are
solely "punitive in nature." They "are not intended
to compensate the injured party, but rather to punish
the [party] whose wrongful action was intentions'
or malicious, and to deter him and others from sire.
ilar extreme conduct" (City of Newport v. Fact Con-
certs, Inc., 453 U.S. 247, 266 (1981)). 13.
Indeed, in Trans World Airlines, this Court specif-
ically discussed and distinguished its decisions under
the different statutory text involved in Brooklyn Sav-
ings Bank and Overnight Motor Transportation. The
Court noted that the "good faith" defense to liqui-
dated damages under the 1947 amendment to the
FLSA was adopted by Congress in "dissatisfaction"
with the Court's earlier conclusion that such damages

___________________(footnotes)

13 This Court stated in International Brotherhood of Elec-
tric Workers v. Foust, 442 U.S. 42, 48 (1979) (internal quo-
tation marks omitted), that "[p]unitive damages are not 
compensation for injury. Instead, they are private fines levied
by civil juries to punish reprehensible conduct and to deter
its future occurrence."

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24

were automatically available as additional compensa-
tion under the FLSA. 469 U.S. at 128 n.22. See
note 12, supra. After Brooklyn Savings Bank and
Overnight Motor Transportation were decided, Con-
gress concluded that liquidated damages under the
ADEA are to be available solely as a punitive meas-
ure to deter "willful violations" of that Act, rather
than as a form of legal compensation to employees
who may incur intangible damages that are too ob-
scure and difficult of proof. See 469 U.S. at 125, 128
n.21. The Tax Court therefore erred (i) in relying
on Brooklyn Savings Bank and Overnight Motor
Transportation-which described the compensatory
nature of mandatory liquidated damages provisions
-and (ii ) in failing to recognize that those very
decisions were distinguished by this Court in Trans
World Airlines, Inc. v. Thurston, when the Court
held that liquidated damages for "willful violations"
of the ADEA are not compensatory but "punitive
in nature." 469 U.S. at 125, 128 n.22. 14.
Because neither back pay nor liquidated damages
under the ADEA compensates the victim of age dis-
crimination for the traditional personal harms asso-
ciated "with personal injury, such as pain and suffer-

___________________(footnotes)

14 The Tax Court similarly erred in relying (Pet. App. 29a)
on a statement contained in unrelated legislative history in-
volving 1978 amendments to the ADEA that, also evidently
relying on the inapposite decisions of Brooklyn Savings Bank
and Overnight Motor Transportation, contained the same mis-
description of the nature of liquidated damages under the
ADEA. This Court's 1985 decision in Trans World Airlines,
Inc. v. Thurston, which plainly held (and clearly explained)
that ADEA liquidated damages are an enforcement mecha-
nism that is punitive in nature, should have laid to rest the
anachronistic error of relying on Brooklyn Savings Bank and
Overnight Motor Transportation for any contrary conclusion.

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25

ing, emotional distress, harm to reputation, [and]
other consequential damages" (United States v.
Burke, 112 S. Ct. at 1873), the recovery of such pay-
ments does not represent damages received "on ac-
count of personal injuries" and is not excluded from
income under Section 104 (a) (2). 15.

C. Liquidated Damages Under The ADEA Are Not Ex-
cluded From Into-me Under Section NM(a) (2) For The
Additional Reason That They Are Awarded "On
Account Of" The Defendant's Willful Misconduct
Rather Than "On Account Of" The Taxpayer's Per-
sonal Injury

The conclusion that ADEA back pay and liquidated
damages are not excluded from income by Section
104 (a) (2) follows directly from this Court's deci-
sions in United States v. Burke and Trans World
Airlines, Inc. v. Thurston. There is, moreover, an
additional and independent reason why respondent's

___________________(footnotes)

15 The Ninth Circuit speculated that "ADEA liquidated
damages might compensate some plaintiffs for the emotional
distress and future psychic injuries they may suffer upon
return to work, for lost future wages which they cannot
mitigate, for lost reputation, for their families' emotional
distress and suffering, for the psychic toll of suing one's
employer or any number of other injuries" (Schmitz v. Com-
missioner, 34 F.3d at 796 n.8). That speculation is entirely
without support. Evidence of these types of personal injuries
is inadmissible in an ADEA trial. See pages 18-19, supra.
Moreover, the amount of the liquidated damages award, when
available, is calculated wholly without consideration of the
extent of such injuries. See page 20, supra. As this Court
held in United States V. Burke, although such personal in-
juries may be presumed to exist, in varying degrees, in any
employment discrimination case (112 S. Ct. at 1873), a statu-
tory remedy that does not in fact compensate those injuries
does not yield damages "on account of personal injuries"
under Section 104 (a) (2).
    
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26

recovery of liquidated damages under the ADEA is
not excluded from income under Section 104 (a) (2). 16.
When applicable, Section 104 (a) (2) permits ex-
clusion only of damages received "on account of" per-
sonal injuries. As the Fourth Circuit concluded in
Commissioner v. Miller, 914 F.2d 586 (1990), dam-
ages awarded as punishment of a wrongdoer, rather
than as compensation for an injury, are awarded "on
account of" malice or willfulness, not "on account of"
personal injury. Id. at 589-592.17 Accord Hawkins
v. United States, 30 F.3d 1077, 1080-1084 (9th Cir.
1994 ), petition for cert. pending, No. 94-1041 (filed
Dec. 9, 1994); Reese v. United States, 24 F.3d 228,

___________________(footnotes)

16 This additional rationale need not be addressed by the
Court if it concludes, under the reasoning of the Court's
decision in Burke, that back pay and liquidated damages
are not excluded from income under Section 104 (a) (2).

17 In Commissioner v. Miller, the court of appeals stated
that recoveries of liquidated damages under the Equal Pay
Act were distinguishable from punitive damages on the
theory that the statutory liquidated damages served "both
a deterrent and compensatory purpose." 914 F.2d at 591.
The court based that description of statutory liquidated
damages solely on its decision in Thompson V. Commissioner,
866 F.2d 709, 711 (4th Cir. 1989). See 914 F.2d at 591.
In turn, in Thompson, the court relied directly on this
Court's decision in Brooklyn Savings Bank for the conclu-
sion that liquidated damages under the Equal Pay Act repre-
sent "compensation" of the employee rather than punish-
ment of the employer. 866 F.2d at 712. That reliance on
Brooklyn Savings Bank was in error for the reasons ex-
plained on pages 20-24, supra. Liquidated damages under
the Equal Pay Act, like the FLSA (after 1947), are not
compensatory; they are available as a deterrence to those
employers who do not act in "good faith." 29 U.S.C. 260.
See Tram World Airlines, Inc. v. Thurston, 469 U.S. at 128
n.22.

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27

230-235 (Fed. Cir. 1994). Punitive damages and
statutory penalties for "willful" violations of the law
thus do not come within the literal terms of the ex-
clusion from income provided by Section 104(a)(2). 18.
1. As the court of appeals explained in Reese v.
United States, 24 F.3d at 230, "[t]he language 'on
account of' is not free of ambiguity; rather, it is
susceptible of at least two conflicting interpretations."

Under a but-for causation approach, the fact
that a plaintiff has to sustain a personal injury
as a prerequisite to an award of punitive dam-
ages leads to the conclusion that the punitive

___________________(footnotes)

18 The only conflicting appellate authority is Horton v.
Commissioner, 33 F.3d 625, 631-632 (6th Cir. 1994). In that
case, the Sixth Circuit stated that it disagreed with the con-
clusion in Commissioner v. Miller, supra, and Hawkins v.
United States, supra, that punitive damages were not ex-
cluded from income under Section 104 (a) (2). The court
reasoned, however, that, under Kentucky law, the taxpayer's
award of punitive damages "served a compensatory function,"
as well as a punitive purpose, and stated that the Miller and
Hawkins decisions were "distinguishable" on that basis. 33
F.3d at 631-632.
The Ninth Circuit once held that punitive damages were
excluded from income under the statute, but did so in reliance
on a 1975 Revenue Ruling that had abandoned the Treasury's
prior, Longstanding position that punitive damages were not
excluded from income under Section 104 (a) (2). See Com-
missioner V. Miller, 914 F.2d at 591, citing Roemer V. Com-
missioner, 716 F.2d 693, 700 (9th Cir. 1983). After the
Treasury returned to its original view, and ruled again in
1984 that punitive damages are not excluded from income,
the Ninth Circuit rejected its decision in Roemer and inter-
preted the statute not to exclude punitive damages from
income. Hawkins v. United States, 30 F.3d at 1082. See Rev.
Rul. 85-98, 1985-2 C.B. 51; Rev. Rul. 84-108, 1984-2 C.B. 32;
Rev. Rul. 75-45, 1975-1 C.B. 47.

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28

damages were "on account of" the plaintiff's in-
jury, even though a punitive damage award re-
quires the additional showing of, and is respon-
sive only to, egregious conduct by the defendant.
However, under a sufficient causation approach,
the fact that personal injury is a prerequisite
to punitive damages does not lead to the con-
clusion that the punitive damages were "on ac-
count of" the plaintiff's injuries because, even
if the other elements of the tort are present,
personal injury alone does not sustain a punitive
damage award. The fact that a plaintiff seeking
punitive damages has to show egregious conduct
by the defendant indicates that the plaintiff's
injury was not a sufficient cause of the punitive
damages. Thus, the mere fact that "on account
of" suggests "causation" does not answer the
question of whether "on account of" suggests
but-for causation or sufficient causation.

Commissioner v. Miller, 914 F.2d at 589-590 (foot-
note omitted ). Accord Reese v. United States, 24 F.3d
at 230-231.
Based upon the "well-recognized, even venerable,
principle that exclusions to income are to be construed
narrowly," these courts correctly resolved the textual
ambiguity in favor of a narrow construction of the
statutory exclusion from income. Commissioner v.
Miller, 914 F.2d at 590, citing Commissioner v.
Jacobson, 336 U.S. 28, 49 (1949). See also Hawkins
v. United States, 30 F.3d at 1084, citing United
States v. Centennial Savings Bank, 499 U.S. at 583-
584. They therefore concluded that punitive damage
awards are not excluded from income under Section
104 (a) (2) because those awards are obtained "on
account of" the defendant's malice or willfulness
rather than "on account of" the personal injuries of
the taxpayer.

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29

2. This interpretation of the text of the statute
comports with its structure, its legislative history and
its evident purpose. As the title of the statute reflects,
Section 104 (a) (2) provides an exclusion from income
for "[c]ompensation for injuries or sickness," not
for sanctions awarded to deter malicious or willful
misconduct. 19. The Federal Circuit correctly observed
in Reese v. United States, 24 F.3d at 231, that the
focus of the statute in general, and of each of its
subsections in particular, 20. is on amounts that com-
pensate for injury or sickness, not on payments ex-
acted to punish misconduct. Accord Hawkins v.
United States, 30 F.3d at 1083. Cf. United States v.
Burke, 112 S. Ct. at 1876 ( Scalia, J., concurring).
"There is also evidence in the legislative history of
section 104(a)(2) supporting the conclusion that

___________________(footnotes)

19 In INS v. National Center for Immigrants' Rights, Inc.,
112 S. Ct. 551 (1991), the Court noted that "the title of a stat-
ute or section can aid in resolving an ambiguity in the legisla-
tion's text." Id. at 556, citing, e.g., Mead Corp. V. Tilley, 490
U.S. 714, 723 (1989) .

20 Section 104 (a) (1) excludes from gross income "amounts
received under workmen's compensation acts as compensation
for personal injuries or sickness." Section 104 (a) (3) ex-
cludes certain "amounts received through accident or health
insurance for personal injuries or sickness * * * ." Section
104 (a) (4) excludes "amounts received as a pension, annuity,
or similar allowance for personal injuries or sickness result-
ing from active service in the armed forces of any country or
in the Coast and Geodetic Survey or the Public Health Serv-
ice * * *." Section 104 (a) (5) excludes "amounts received by
an individual as disability income attributable to injuries
incurred as a direct result of a * * * terrorist attack * * *
while such individual was an employee of the United States
engaged in the performance of his official duties outside the
United States." See 26 U.S.C. 104(a)(1)-(5).

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30

punitive damages are not excludable from gross in-
come." Reese v. United States, 24 F.3d at 232. Just
prior to the enactment of the original version of Sec-
tion 104 (a) (2) as Section 213(b) (6) of the Revenue
Act of 1918 (see note 3, supra),

the Secretary of the Treasury requested an opin-
ion from the Attorney General concerning the
tax treatment of accident insurance proceeds re-
ceived on account of personal injuries. See 31
Op. Atty.Gen. 304 (1918). In response, the At-
torney General concluded that "the proceeds of
an accident insurance policy [were] not `gains
or profits and income'" but were instead a re-
turn of capital and hence were not taxable in
accordance with statute and precedent. Id. at
308; accord Doyle v. Mitchell Bros. Co., 247 U.S.
179, 185 (1918).
After the Attorney General's report, the IRS
issued a decision holding that "the proceeds of
an accident insurance policy received by an in-
dividual on account of personal injuries  . . . . 
[were] not taxable  . . . . " T.D. 2747, 20 Treas.
Dec. Int.Rev. 457 (1918). Moreover, the IRS
held "upon similar principles that an amount re-
ceived by an individual as the result of a suit or
compromise for personal injuries" would not be
taxable. Id.
Subsequent to these events, section 213(b) (6)
was enacted. In a 1918 report of the House Com-
mittee on Ways and Means, Congress explained
the rationale behind section 213 (b) (6) as fol-
lows :

Under the present law it is doubtful
whether amounts received through accident
or health insurance, or under workmen's
compensation acts, as compensation for per-
sonal injury or sickness, and damages re-

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31
                     
ceived on account of such injuries or sick-
ness, are required to be included in gross
income. The proposed bill provides that such
amounts shall not be included in gross
income.

H.R.Rep. No. 767, 65th Cong., 2d Sess. 9-10
(1918). With the passage of section 213(b) (6),
Congress likely intended to codify the IRS's
stated approach, which was in turn based on the
Attorney General's opinion. After the enactment
of section 213 (b) (6), the IRS noted that "so far
as personal injuries are concerned, [section
213 (b) (6) ] is merely declarative of the [Attor-
ney General's and IRS's] conclusions and in-
tended to go no further." 2 C.B. 71, 72 (1920)
(citing 31 Op.Atty.Gen. 304 and T.D. 2747).
The IRS continued: "These conclusions rest, as
stated, upon the theory of conversion of capital
assets. It would follow that personal injury not
resulting in the destruction or diminution in the
value of a capital asset would not be within the
exemption." Id. at 72.
In view of the focus on the "conversion of
capital assets" theory in the passage of section
104 (a) (2)`s predecessor, it would be inconsis-
tent with the legislative history to treat punitive
damages as excludable from income, since puni-
tive damages in no way resemble a return of
capital.

Reese v. United States, 24 F.3d at 233 (parallel cita-
tions omitted).
This Court reviewed much of this same legislative
and administrative history in Commissioner v. Glen-
shaw Glass Co., 348 U.S. 426 (1955). In that case,
the Court concluded that punitive damages for fraud
and statutory treble damages under the antitrust

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32

laws are income subject to tax. In so holding, the
Court stated (id. at 432 n.8) (emphasis added) :

The long history of departmental rulings hold-
ing personal injury recoveries nontaxable on the
theory that they roughly correspond to a return
of capital cannot support exemption of punitive
damages [.] * * * Damages for personal injury
are by definition compensatory only.

As this Court thus indicated in Glenshaw Glass, the
limitation of Section 104(a) (2) to damages that com-
pensate for the injury-and its inapplicability to
awards that punish and deter others-comports with
the history and purpose of the statute, as well as with
its text and structure. See Hawkins v. United States,
30 F.3d at 1080-1084; Commissioner v. Miller, 914
F.2d at 590. See also 1 B. Bittker, Federal Taxation
of Income, Estates and Gifts Par. 13.1.4 (1981) ("The
rationale for [Section 104 (a) (2) ] * * * is presum-
ably that the recovery does not generate a gain or
profit but only makes the taxpayer whole by compen-
sation for a loss."). 21.
3. In 1989, Section 104 (a) was amended to pro-
vide that Section 104 (a) (2)'s exclusion "shall not
apply to any punitive damages [received] in connec-
tion with a case not involving physical injury or physi-
cal sickness." 26 U.S.C. 104 (a) (Supp. V 1993).
See Revenue Reconciliation Act of 1989, Pub. L. No.
101-239, Tit. VII,  7641(a), 103 Stat. 2379. In

___________________(footnotes)

21 In Starrels v. Commissioner, 304 F.2d 574, 576 (9th Cir.
1962), the court explained that the history and administra-
tion of this statute reveal that "[d]amages paid for personal
injuries are excluded from gross income because they make
the taxpayer whole from a previous loss of personal rights-
because, in effect, they restore a loss to capital."

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33

Burke, this Court suggested that this amendment
"allow [s]" the exclusion of punitive damages in phy-
sical injury cases after 1989. 112 S. Ct. at 1871 n.6.
That question, however, was not presented in Burke
and had not been addressed by the parties in that
case. The Court's statements on that issue in Burke
were therefore dicta. 22. The proper interpretation of

___________________(footnotes)

22 As Professor Kahn has recently demonstrated, the sug-
gestion that the 1989 amendment allows the exclusion of puni-
tive damages in physical injury cases after 1989 is at odds
with the history and context of the amendment. Kahn, Taxa-
tion of Punitive Damages Obtained in a Personal Injury
Claim, 65 Tax Notes 487 (1994). The 1989 amendment origi-
nated in a House bill that would have confined the statutory
exclusion to damages received in cases involving physical in-
jury or physical sickness. H.R. 3299, 101st Cong., 1st Sess.
11641 (1989). The House report states that this bill was a
reaction to then-recent decisions (prior to Burke) that had
held damages recovered in nonphysical injury cases involv-
ing employment discrimination and injury to reputation to be
excluded from gross income. H.R. Rep. No. 247, 101st Cong.,
1st Sess. 1354-1355 (1989). The House bill was modified in
conference to provide only that the Section 104(a) (2) exclu-
sion "shall not apply to any punitive damages [received] in
connection with a case not involving physical injury or physi-
cal sickness." Revenue Reconciliation Act of 1989, Pub. L. No.
101-239, Tit. VII, 7641 (a), 103 Stat. 2379, Professor Kahn
notes that the Conference Committee redacted language from
another version of the bill that had affirmatively provided for
the exclusion of punitive damages received in physical injury
cases and substituted the "double negative" phraseology con-
tained in the 1989 amendment. 65 Tax Notes at 489-490. The
amendment thus enacted by Congress precludes application
of the Section 104 (a) (2) exclusion to punitive damages re-
ceived in nonphysical injury cases but is silent as to the taxa-
tion of punitive damages received in physical injury cases.
Any interpretation of this amendment to allow the exclusion
of punitive damages in physical injury cases after 1989 would

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34

the 1989 amendment is also not at issue in the pres-
ent case, which does not involve a physical injury
and instead involves an unlawful discharge and an
associated tax return which preceded the effective
date of the 1989 amendment.
The 1989 amendment also does not indicate that
punitive damages and statutory penalties were ex-
cluded from gross income under the pre-1989 ver-
sion of the statute. Neither the text of the amend-
ment nor its history supports any suggestion that
Congress (either in 1989 or in 1919) believed puni-
tive damages were properly excluded from tax under
the original statute. 23. See note 22, supra.

At the time of the proposed amendment, several
cases had recently held that  104(a) (2) ex-
cludes damages recovered in cases involving em-
ployment discrimination and injury to reputa-
tion * * * and some had even held that punitive
damages awarded in such cases are excludable.
* * * That Congress elected to overrule such
cases does not prove that, prior to Congress's
action, the statute meant the opposite.

Hawkins v. United Slates, 30 F.3d at 1082. See also
Higgins v. Smith, 308 U.S. 473, 479-480 (1940) (re-

___________________(footnotes)

thus be contrary to the fundamental principle of statutory
construction that " [e]xemptions from taxation do not rest
upon implication." United States Trust Co. v. Helvering, 307
U.S. 57, 60 (1939).

23 As this Court has frequently emphasized, "the views of a
subsequent Congress form a hazardous basis for inferring the
intent of an earlier one." United States v. Price, 361 U.S. 304,
313 (1960). The interpretive value of an amendment to a
statute is particularly dubious when, as here, the amendment
was enacted long after the original provision. Rainwater V.
United States, 356 U.S. 590, 593 (1958).

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35

Jetting claim that enactment of an amendment ex-
plicitly forbidding a deduction for losses establishes
that the law was formerly otherwise).
4. Liquidated damages for "willful violations" of
the ADEA, like punitive damages generally, are "not
intended to compensate the injured party, but rather
to punish the [party] whose wrongful action was
intentional or malicious, and to deter him and others
from similar extreme conduct" (City of Newport v.
Fact Concerts, Inc., 453 U.S. at 266-267). See Trans
World Airlines, Inc. v. Thurston, 469 U.S. at 125,
Such damages are awarded on account of the employ-
er's willful misconduct, not as compensation for in-
jury. They are therefore not excluded from income
under Section 104 (a) (2).

CONCLUSION

The judgment of the court of appeals should be
reversed.

Respectfully submitted.

DREW S. DAYS, III
Solicitor General

LORETTA C. ARGRETT
Assistant Attorney General

LAWRENCE G. WALLACE
Deputy Solicitor General

KENT L. JONES
Assistant to the Solicitor General

ANN B. DURNEY
EDWARD T. PERELMUTER
Attorneys

DECEMBER 1994

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