To amend the Internal Revenue Code of 1986 to exclude from gross income amounts received on account of claims based on certain unlawful discrimination and to allow income averaging for backpay and frontpay awards received on account of such claims, and for other purposes.

Summary: Civil Rights Tax Relief Act of 2007 - Amends the Internal Revenue Code to: (1) allow an exclusion from gross income for amounts received (either backpay or frontpay or punitive damages) on account of an unlawful discrimination claim; and (2) allow income averaging for backpay and frontpay amounts received from such claims.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Civil Rights Tax Relief Act of 
2007''.

SEC. 2. EXCLUSION FROM GROSS INCOME FOR AMOUNTS RECEIVED ON ACCOUNT OF 
              CERTAIN UNLAWFUL DISCRIMINATION.

    (a) In General.--Part III of subchapter B of chapter 1 of the 
Internal Revenue Code of 1986 (relating to items specifically excluded 
from gross income) is amended by inserting after section 139A the 
following new section:

``SEC. 139B. AMOUNTS RECEIVED ON ACCOUNT OF CERTAIN UNLAWFUL 
              DISCRIMINATION.

    ``(a) Exclusion.--Gross income does not include amounts received by 
a claimant (whether by suit or agreement and whether as lump sums or 
periodic payments) on account of a claim of unlawful discrimination (as 
defined by section 62(e)).
    ``(b) Amounts Covered.--For purposes of subsection (a), the term 
`amounts' does not include--
            ``(1) backpay or frontpay, as defined in section 1302(b), 
        or
            ``(2) punitive damages.''.
    (b) Clerical Amendment.--The table of sections for part III of 
subchapter B of chapter 1 of such Code is amended by inserting after 
the item relating to section 139A the following:

``Sec. 139B. Amounts received on account of certain unlawful 
                            discrimination.''.
    (c) Effective Date.--The amendment made by this section shall apply 
to amounts received in taxable years beginning after December 31, 2006.

SEC. 3. LIMITATION ON TAX BASED ON INCOME AVERAGING FOR BACKPAY AND 
              FRONTPAY RECEIVED ON ACCOUNT OF CERTAIN UNLAWFUL 
              EMPLOYMENT DISCRIMINATION.

    (a) In General.--Part I of subchapter Q of chapter 1 of the 
Internal Revenue Code of 1986 (relating to income averaging) is amended 
by adding at the end the following new section:

``SEC. 1302. INCOME FROM BACKPAY AND FRONTPAY RECEIVED ON ACCOUNT OF 
              CERTAIN UNLAWFUL EMPLOYMENT DISCRIMINATION.

    ``(a) General Rule.--If employment discrimination backpay or 
frontpay is received by a taxpayer during a taxable year, the tax 
imposed by this chapter for such taxable year shall not exceed the sum 
of--
            ``(1) the tax which would be so imposed if--
                    ``(A) no amount of such backpay or frontpay were 
                included in gross income for such year, and
                    ``(B) no deduction were allowed for such year for 
                expenses (otherwise allowable as a deduction to the 
                taxpayer for such year) in connection with making or 
                prosecuting any claim of unlawful employment 
                discrimination by or on behalf of the taxpayer, plus
            ``(2) the product of--
                    ``(A) the number of years in the backpay period and 
                frontpay period, and
                    ``(B) the amount by which the tax determined under 
                paragraph (1) would increase if the amount on which 
                such tax is determined were increased by the average 
                annual net backpay and frontpay amount.
    ``(b) Definitions.--For purposes of this section--
            ``(1) Employment discrimination backpay or frontpay.--The 
        term `employment discrimination backpay or frontpay' means 
        backpay or frontpay receivable (whether as lump sums or 
        periodic payments) on account of a claim of unlawful employment 
        discrimination.
            ``(2) Unlawful employment discrimination.--The term 
        `unlawful employment discrimination' has the meaning provided 
        the term `unlawful discrimination' in section 62(e).
            ``(3) Backpay and frontpay.--The terms `backpay' and 
        `frontpay' mean amounts includible in gross income in the 
        taxable year--
                    ``(A) as compensation which is attributable--
                            ``(i) in the case of backpay, to services 
                        performed, or that would have been performed 
                        but for a claimed violation of law, as an 
                        employee, former employee, or prospective 
                        employee before such taxable year for the 
                        taxpayer's employer, former employer, or 
                        prospective employer, and
                            ``(ii) in the case of frontpay, to 
                        employment that would have been performed but 
                        for a claimed violation of law, in a taxable 
                        year or taxable years following the taxable 
                        year; and
                    ``(B) which are--
                            ``(i) ordered, recommended, or approved by 
                        any governmental entity to satisfy a claim for 
                        a violation of law, or
                            ``(ii) received from the settlement of such 
                        a claim.
            ``(4) Backpay period.--The term `backpay period' means the 
        period during which services are performed (or would have been 
        performed) to which backpay is attributable. If such period is 
        not equal to a whole number of taxable years, such period shall 
        be increased to the next highest number of whole taxable years.
            ``(5) Frontpay period.--The term `frontpay period' means 
        the period of foregone employment to which frontpay is 
        attributable. If such period is not equal to a whole number of 
        taxable years, such period shall be increased to the next 
        highest number of whole taxable years.
            ``(6) Average annual net backpay and frontpay amount.--The 
        term `average annual net backpay and frontpay amount' means the 
        amount equal to--
                    ``(A) the excess of--
                            ``(i) employment discrimination backpay and 
                        frontpay, over
                            ``(ii) the amount of deductions that would 
                        have been allowable but for subsection 
                        (a)(1)(B), divided by
                    ``(B) the number of years in the backpay period and 
                frontpay period.''.
    (b) Clerical Amendment.--The table of sections for part I of 
subchapter Q of chapter 1 of such Code is amended by inserting after 
section 1301 the following new item:

``Sec. 1302. Income from backpay and frontpay received on account of 
                            certain unlawful employment 
                            discrimination.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to amounts received in taxable years beginning after December 31, 
2006.

SEC. 4. INCOME AVERAGING FOR BACKPAY AND FRONTPAY RECEIVED ON ACCOUNT 
              OF CERTAIN UNLAWFUL EMPLOYMENT DISCRIMINATION NOT TO 
              INCREASE ALTERNATIVE MINIMUM TAX LIABILITY.

    (a) In General.--Section 55(c) of the Internal Revenue Code of 1986 
(defining regular tax) is amended by redesignating paragraph (2) as 
paragraph (3) and by inserting after paragraph (1) the following:
            ``(2) Coordination with income averaging for amounts 
        received on account of employment discrimination.--Solely for 
        purposes of this section, section 1302 (relating to averaging 
        of income from backpay or frontpay received on account of 
        certain unlawful employment discrimination) shall not apply in 
        computing the regular tax.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2006.