Dear Senator:
The American Civil Liberties Union strongly urges you to support S. 557, the Civil Rights Tax Relief Act. This bipartisan legislation, which is sponsored by Senator Susan Collins (R-ME) and more thirty-five other Senators, would promote settlement of civil rights claims and enhance fair enforcement of civil rights laws by reinstating tax provisions that Congress inadvertently eliminated in 1996.
The Civil Rights Tax Relief Act would correct a mistake that Congress made when it passed the Small Business Job Protection Act of 1996. The 1996 legislation made taxable any damage awards not based on ""physical injuries or physical sickness."" Although the purpose of the legislation was to tax court-ordered damages for claims such as emotional distress, the unintended result was to tax civil rights settlements and awards. We believe that no one in Congress intended to use the 1996 legislation to harm persons bringing civil rights cases.
The Civil Rights Tax Relief Act corrects the error by exempting most civil rights damage awards and settlements from a person's taxable income and allowing income averaging for backpay and frontpay awards based on civil rights claims. Of particular importance are civil rights claims in which the victim of discrimination incurs attorney's fees, but all or most of the actual relief is non-monetary, i.e., the defendant is agreeing to policy changes prohibiting discrimination in the future, but not paying actual damages. In many of those cases, the victim of the discrimination ends up receiving little or no money, but still gets taxed on his or her attorney's fees that were paid by the defendant (the eventual result is double-taxation of the attorney's fees because the attorney also pays income tax on the fees). In several cases, a victim of discrimination has ended up owing more money to the I.R.S. than he or she actually received for settling or winning a civil rights case.
The reason that more than one-third of the Senate is sponsoring the Civil Rights Tax Relief Act--and that groups ranging from the U.S. Chamber of Commerce and the American Small Business Alliance to the Leadership Conference on Civil Rights and AARP have endorsed the bill--is because it promotes early and fair settlement of civil rights cases. During the past six years, civil rights cases have become increasingly difficult to settle because both sides have had no choice but to focus on the excessive taxes that the victim of discrimination will have to pay after the case settles. The tax mistake made by Congress six years ago has driven up the cost of settlement, and forced victims of civil rights violations to become tax experts in trying to figure out whether they will be left paying more in taxes than they receive in settlement. Even the potential of a financially crippling tax bill will keep victims of discrimination from protecting their civil rights.
The ACLU urges you to enhance full and fair settlement and enforcement of civil rights claims by passing the Civil Rights Tax Relief Act. Please feel free to contact us if you have any questions, or if we can be of assistance.
Very truly yours,