Fedweek Legal

Melvin Porter, an employee of the U.S. Agency for International Development, sued his employer in U.S. District Court in the District of Columbia, claiming that he was denied promotion twice in violation of Title VII of the 1964 Civil Rights Act. The court found the denials of promotion were retaliatory and awarded Mr. Porter compensatory damages in the amount of $15,000 on each claim. The court denied Mr. Porter’s motions for promotion, back pay, and benefits. See Porter v. U.S. Agency for Int’l Dev., D.D.C., No. Civ. A-00-1954(JR), 11/25/03.

Mr. Porter’s counsel requested that the court “gross up” the award to cover any tax liability for the over $200,000 in attorney fees incurred. In the alternative, counsel requested the court to order the agency to indemnify Mr. Porter against any adverse tax consequences for such fees. In November 2003, the court declined, due to the assignment of income doctrine under current tax laws. See May 7, 2003, Fedweek Legal Corner Article, “Legislation To End Tax In Discrimination Suits.”

However, importantly, the court expounded upon the injustice that this assignment of income doctrine, applied under current tax laws, places upon the plaintiff. The court stated, “[t]he unhappy result is (or theoretically can be) that the tax consequences of an award of compensatory damages can seriously diminish or even exceed the award.” The court continued to state that, while attorney fees can be partly deductible, the deduction is not available if the alternate minimum tax is triggered, which is likely in such cases.

The court made the fee award directly to plaintiff’s counsel, stating that the award would include an explanation “to aid in assessment of tax and preparation of returns.” The court also pointed out that an attorney fees award in a Title VII case is not part of compensatory damages and the fee award is not a percentage or subset of damages, but rather a separate award, separately provided under the fee-shifting provisions of Title VII.

The court’s strong language, citing the injustice of the IRS position, supports the argument that successful Title VII plaintiffs should not suffer adverse tax consequences on attorney fees awards. However, Congress must act accordingly in order for the situation to be remedied. Under proposed legislation, the taxation of attorney fees awards in Title VII cases would be completely eliminated.

** This information is provided by the attorneys at Passman & Kaplan, P.C., a law firm dedicated to the representation of federal employees worldwide. For more information on Passman & Kaplan, P.C., go to http://www.passmanandkaplan.com. **