The court reasoned that the liquidated damages are wholly punitive in nature and do not compensate the victim for the intangible effects of discrimination. Lacking such compensatory damages, the District Court concluded that the ADEA does not satisfy the Burke tort-like standard. An issue not raised in Downey II, but that the IRS will probably raise in a future case, concerns punitive damages. In Downey II, the court held that the liquidated damages served a punitive as well as compensatory purpose. The taxation of punitive damages under IRC Sec.
Discrimination is a nonphysical injury.
Since the Tax Court ruled that the liquidated damages serve a punitive as well as a compensatory purpose, the IRS could very plausibl argue that part of the liquidated damages are taxable under the 1989 amendment. Age discrimination in employment suits are likely to increase in the future because of the aging work force and corporate downsizing and restructuring. Although Downey II is a very favorable ruling for employees and employers, the IRS is likely to appeal, arguing that the back pay does not satisfy the tort-like requirements of Burke. In addition, it could argue that the liquidate damages also do not meet the Burke standard. The IRS has a good chance of prevailing on the back pay issue, especially in cases involving nonwillful violations.