SEC. 2. EXCLUSION FROM GROSS INCOME FOR AMOUNTS 
RECEIVED ON ACCOUNT OF CERTAIN UNLAW-
FUL DISCRIMINATION. 
(a) IN GENERAL.—Part III of subchapter B of chap-
ter 1 of the Internal Revenue Code of 1986 (relating to 
items specifically excluded from gross income) is amended 
by inserting before section 140 the following new section: 
‘‘SEC. 139F. AMOUNTS RECEIVED ON ACCOUNT OF CERTAIN 
UNLAWFUL DISCRIMINATION. 
‘‘(a) EXCLUSION.—Gross income does not include 
amounts received by a claimant on account of a judgment 
or settlement (whether by suit or agreement and whether 
as lump sums or periodic payments) resulting from a 
claim of unlawful discrimination (as defined by section 
62(e)). 
‘‘(b) AMOUNTS COVERED.—For purposes of sub-
section (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 before the item relating to section 
140 the following new item: 
‘‘Sec. 139F. Amounts received on account of certain unlawful discrimination.’’. 
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(c) EFFECTIVE DATE.—The amendment made by 
this section shall apply to amounts received in taxable 
years beginning after December 31, 2012. 
SEC. 3. LIMITATION ON TAX BASED ON INCOME AVER-
AGING FOR BACKPAY AND FRONTPAY RE-
CEIVED ON ACCOUNT OF CERTAIN UNLAW-
FUL EMPLOYMENT DISCRIMINATION. 
(a) IN GENERAL.—Part I of subchapter Q of chapter 
1 of the Internal Revenue Code of 1986 (relating to in-
come averaging) is amended by adding at the end the fol-
lowing new section: 
‘‘SEC. 1302. INCOME FROM BACKPAY AND FRONTPAY RE-
CEIVED ON ACCOUNT OF CERTAIN UNLAW-
FUL 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 tax-
able 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 de-
duction to the taxpayer for such year) in con-
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nection 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 deter-
mined under paragraph (1) would increase if 
the amount on which such tax is determined 
were increased by the average annual net back-
pay and frontpay amount. 
‘‘(b) DEFINITIONS.—For purposes of this section— 
‘‘(1) EMPLOYMENT DISCRIMINATION BACKPAY 
OR FRONTPAY.—The term ‘employment discrimina-
tion backpay or frontpay’ means backpay or 
frontpay receivable (whether as lump sums or peri-
odic payments) on account of a claim of unlawful 
employment discrimination. 
‘‘(2) UNLAWFUL
EMPLOYMENT
DISCRIMINA-
TION.—The term ‘unlawful employment discrimina-
tion’ 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— 
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‘‘(A) as compensation which is attrib-
utable— 
‘‘(i) in the case of backpay, to services 
performed, or that would have been per-
formed but for a claimed violation of law, 
as an employee, former employee, or pro-
spective employee before such taxable year 
for the taxpayer’s employer, former em-
ployer, or prospective employer, and 
‘‘(ii) in the case of frontpay, to em-
ployment that would have been performed 
but for a claimed violation of law, in a tax-
able year or taxable years following the 
taxable year, and 
‘‘(B) which are received on account of a 
judgment or settlement resulting from a claim 
for a violation of law. 
‘‘(4) BACKPAY PERIOD.—The term ‘backpay pe-
riod’ 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. 
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‘‘(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 pe-
riod 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 back-
pay and frontpay, over 
‘‘(ii) the amount of deductions that 
would have been allowable but for sub-
section (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.’’. 
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(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to amounts received in taxable 
years beginning after December 31, 2012. 
SEC. 4. INCOME AVERAGING FOR BACKPAY AND FRONTPAY 
RECEIVED ON ACCOUNT OF CERTAIN UNLAW-
FUL EMPLOYMENT DISCRIMINATION NOT TO 
INCREASE ALTERNATIVE MINIMUM TAX LI-
ABILITY. 
(a) IN GENERAL.—Section 55(c) of the Internal Rev-
enue Code of 1986 (defining regular tax) is amended by 
redesignating paragraph (3) as paragraph (4) and by in-
serting after paragraph (2) the following: 
‘‘(3) COORDINATION WITH INCOME AVERAGING 
FOR AMOUNTS RECEIVED ON ACCOUNT OF EMPLOY-
MENT DISCRIMINATION.—Solely for purposes of this 
section, section 1302 (relating to averaging of in-
come 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, 2012. 
Æ 
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