The manner in which proceeds from employment-related litigation were to be taxed was unclear prior to 1996. That year, previously-established guidelines were fundamentally altered by the Small Business Job Protection Act of 1996 (the “Jobs Act”). Nine years later, the U.S. Supreme Court’s consolidated decision in Commissioner v. Banks and Commissioner v. Banaitis provided further guidance. In that opinion, the Court determined that, as a general rule, contingent attorneys’ fees constitute income to plaintiffs, resolving a bitter split among federal appellate courts.

This chapter from Employee Rights Litigation: Pleading and Practice (Matthew Bender) provides a comprehensive overview of the federal income tax treatment of monetary recoveries in the employment litigation context. The discussion initially addresses the Jobs Act; punitive damages; emotional distress recoveries; and the meaning of “physical” injury or illness for income tax purposes. Next, the chapter turns to the American Jobs Creation Act of 2004; the Banks decision; back pay awards; severance pay; and recoveries for contract-based, as opposed to personal injury, claims. The discussion concludes with coverage of mischaracterization of recoveries; recoveries subject to self-employment taxes; penalties for failure to withhold; discrimination recoveries; allocating proceeds among claims; and employers’ reporting obligations.

Employee Rights Litigation: Pleading and Practice (Matthew Bender) provides complete coverage of the basic legal standards governing the statutory and common law claims that can be raised on behalf of employees for discriminatory treatment or wrongful discharge. It contains analysis of Title VII of the Civil Rights Act of 1964, Age Discrimination in Employment Act, Equal Pay Act, Rehabilitation Act, Americans with Disabilities Act, Family and Medical Leave Act, ERISA, Labor-Management Reporting and Disclosure Act, Fair Labor Standards Act, Worker Adjustment and Retraining Notification Act, and workers’ compensation laws. The publication also assists the practitioner with helpful checklists, practice pointers, cautions and warnings, citations to significant cases, and a statutory appendix.

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