Nothing is certain but death and taxes: How can you avoid a pyrrhic victory?

    Albert Brown began working for the Mississippi Department of Health on January 1, 1997.  He performed well, and progressed steadily through the ranks until he applied for the position of Chief Systems Information Officer.  Despite his qualifications, Brown was not selected.  On February 16, 2011, he sued MDH for race discrimination and retaliation in the Circuit Court of Hinds County, Mississippi.  On June 14, 2012, he won – a unanimous jury found that the MDH retaliated against him.  To make him whole, the Court awarded him four years of future wages.  

Perversely, this lump sum award pushed Brown into a higher tax bracket, which cost him an additional $35,620.00 in taxes.  Brown moved the Court for relief, but the Court refused to compensate him for the negative tax consequences of his award.  Brown appealed, and in late 2013, the Fifth Circuit Court of Appeals ruled against him.  

On April 29, 2014, Brown filed his Petition for Writ of Certiorari with the Supreme Court.  The question he presented is both logical and of vital importance:  May a court, under Title VII of the Civil Rights Act of 1964, increase an award of front or back pay in a discrimination case to offset the negative tax liabilities the prevailing plaintiff will suffer for receiving the wages in a lump sum instead of over several years?  The 3rd, 4th, and 10th Circuits allow courts this discretion.  The 5th, 8th, and D.C. Circuits have found that such a remedy is not available.

One of MDH’s primary policy arguments is that the tax issue should be left to Congress.  It points to the Tax Reform Act of 1986, which, among other things, repealed “income averaging.”  Between 1943 and 1986, taxpayers were allowed to “income average” over a 5-year period if they chose to do so.  This was beneficial to taxpayers with volatile incomes, because by averaging they could smooth the volatility to avoid higher tax brackets.  If income averaging was still allowed, Brown would likely be able to avoid the negative tax consequences that resulted from the lump sum award.  

MDH argues that the repeal of income averaging clearly shows that Congress has “spoken on the issue.”  Accordingly, if the negative tax consequences are to be “fixed,” it is Congress, not the courts, that should fix it. 

This argument is misguided.  Congress’s reasons for eliminating “income averaging” in 1986 were a lot broader than back and future pay awards in Title VII cases, which are not mentioned in the statute or the legislative history.  To conclude that Congress has “spoken” on this specific issue (i.e., whether courts can provide equitable relief for negative tax consequences in discrimination cases) solely because of its repeal of income averaging in general, is to read far too much into the actions of Congress.  The evidence simply does not support this conclusion. 

Further, the Supreme Court’s 1976 decision in Franks v. Bowman Transportation Co., Inc., 424 U.S. 747, provides precedent that the 5th, 8th, and D.C. Circuits got it wrong when they determined that they lacked the authority to compensate a prevailing discrimination plaintiff for the tax consequences of an award of front or back pay.  In Franks, the Court emphasized that:

“to effectuate Title VII’s objective of making persons whole for injuries suffered on account of unlawful employment discrimination, vests broad equitable discretion in the federal courts to ‘order such affirmative action as may be appropriate, which may include, but is not limited to, reinstatement or hiring of employees, with or without back pay . . . or any other relief as the court deems appropriate.’”  

424 U.S. at 763, quoting Albermarle Paper Co. v. Moody, 422 U.S. 405, 418 (1975) (emphases added).

     For the past 40 years, it has been clear that courts have “broad equitable discretion” to achieve Title VII’s objective of making persons whole for injuries suffered from unlawful employment discrimination.  To remedy those injuries, beyond reinstatement and back pay, the court may include “any other relief deemed appropriate.”  Tax relief falls well within these parameters when higher taxes resulting from a lump sum payment preclude the injured party from being made “whole.”    

     It is critical that the Supreme Court resolve this 3-3 Circuit split.  Until then, in some parts of the country, our tax system prevents successful discrimination plaintiffs from truly being made “whole for [the] injuries [they] suffered on account of unlawful discrimination.”