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Supreme Court Finally to Address Taxation of Damage Awards (and Disparate Impact Age Cases Too)

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Those of us who have been following the taxation of damage awards issue for several years now cannot help more than a twinge of excitement about the fact that the U.S. Supreme Court has finally decided to address the issue — regardless of the ultimate outcome of the case. You know you care too much about this issue when you find yourself upset over the relative dearth of news coverage for yesterday’s cert grant in two tax cases, when compared to another case the Supreme Court decided to hear yesterday: whether disparate impact claims may be brought under the Age Discrimination in Employment Act. While that case is certainly important too, the two tax cases have the potential to affect almost every civil rights litigant, as the Court could either wipe out the current double taxation of most discrimination awards, or by erasing the circuit splits, cause every taxpayer to be subjected to them, even those who currently have favorable protections.

Yesterday, March 29, 2004, the Supreme Court agreed to hear (or granted cert in) two cases, C.I.R. (Commissioner of Internal Revenue) v. Banks and C.I.R. v. Banaitis, both which involve individuals who brought wrongful termination claims against their former employers.

John W. Banks, II, worked as an educational consultant for the California Department of Education for fourteen years before he was fired. He then filed a lawsuit in federal court in California contending that his civil rights were violated under sect. 1983 and Title VII of the Civil Rights Act (and some additional claims, most of which were later dropped.) His case proceeded to trial in 1990, and during the trial, the parties began discussing settlement. Banks settled the case during trial for $464,000 — much less than his original demand of $850,000 — because he believed that none of the settlement would be taxable. The parties characterized his settlement as “personal injury” damages not subject to taxation, he paid $150,000 of his award to his attorney under a contingency fee arrangement, and paid no taxes on any of the settlement amount for the tax year 1990. In 1997, the IRS issued a “Notice of Deficiency,” claiming Banks owed $101,168.00, based on his failure to pay taxes on the settlement amount above. Banks filed a petition in the Tax Court, seeking a declaration that he did not owe the taxes at issue, but the Tax Court ruled against him.

Luckily for Banks in this instance, he had moved from California to Michigan, which meant that he could appeal his ruling to the 6th Circuit Court of Appeals, which had previously ruled favorably for plaintiffs in his situation, as compared to the 9th Circuit Court of Appeals, which has not treated California plaintiffs nearly as well. Banks was lucky enough to be one of the few plaintiffs nationwide to successfully appeal his ruling and win his case at the circuit level. (See Banks v. C.I.R. Sixth Circuit, 2003) The Sixth Circuit determined that four factors weighed in Banks favor when analyzing whether he should have to pay taxes on the portion that went to his attorney:

“(1) the fact that the claim, at the time the contingency fee agreement was signed, was “an intangible, contingent expectancy,” (2) taxpayer’s claim was like a partnership or joint venture in which the taxpayer assigned away one-third in hope of recovering two-thirds; (3) no tax-avoidance purpose was at work with the contingency fee arrangement . . .; and (4) double taxation would otherwise result by including the contingency fee in taxpayer’s income.

The Sixth Circuit likened Banks’ lawsuit to a situation where an orchard owner gives some of his trees to someone else to care for, so that the fruit yielded by the tree is dependent on the care it receives from the new caretaker. Without Banks’ lawyer, his lawsuit would not have borne nearly as much fruit. As the court said, “By signing the contingency fee agreement, [Banks] transferred some of the trees from the orchard, rather than simply transferring some of the orchard’s fruit.”

Sigitas Banaitis, the other plaintiff affected by the Supreme Court’s ruling, worked for seven years as a vice president and loan officer with the Bank of California in Oregon, where he had access to a great deal of confidential financial information of companies who received financing from the bank. In 1984, the Mitsubishi Bank obtained a controlling interest in the Bank of California, which greatly troubled many of Banaitis’ clients, as the Mitsubishi Group, the bank’s parent company, controlled many of the direct competitors of Banaitis’ clients. Banaitis had many of his clients therefore demand that he keep their financial information confidential and not available for review by others employed by the Mitsubishi Bank or Bank of California, which eventually caused Banaitis trouble with his superiors and led to his leaving the Bank of California, after he had been given a letter telling him he had 30 minutes to clean out his desk — one day before his pension for the year had vested. Banaitis hired attorney Charles Merten of Portland under a contingency fee arrangement, and proceeded to take his case to trial. At trial, he was awarded over $6 million in back wages, emotional distress, and punitive damages. The banks appealed the ruling, but later settled in 1995 with Banaitis for $8.7 million, which included fees of $3,864,012 to attorney Merten, and the rest retained by Banaitis. For the tax year 1995, Banaitis excluded the entire settlement amount from his income, while attaching an explanatory sheet to his return stating that he believed the settlement amount to not be taxable. The IRS disagreed, filing a Notice of Deficiency against him, concluding he owed an additional $1,708,216 in taxes, resulting from the application of the alternative minimum tax to Banaitis’ deduction for his attorney’s fee. The Tax Court ruled against Banaitis, and he appealed his case to the 9th Circuit Court of Appeals, where like Banks, he prevailed. (See Banaitis v. C.I.R., Ninth Circuit, 2003)

Unlike some previous California and Alaska plaintiffs who had appealed their cases to the 9th Circuit, Banaitis lived in Oregon, and was therefore subject to Oregon law which determined the status of his relationship with his attorney, known as the attorney lien law. The Ninth Circuit held that Oregon’s lien law was different than the ones it had previously considered, holding that

Oregon law is unlike the laws of California and Alaska. In pertinent part, in fact, Oregon law mirrors Alabama law in that it affords attorneys generous property interests in judgments and settlements….In some respects, in fact, Oregon goes even further than does the Alabama law at issue in Cotnam.

[Plaintiffs subject to Alabama law have previously prevailed, based upon the state’s lien law in a key case from 1959 called Cotnam v. Commissioner.] Based on this ruling, Banaitis was not required to pay taxes on Merten’s portion of his award.

Many plaintiffs who have lost this issue and who have accordingly been forced to pay taxes on their attorney fee awards have petitioned the Supreme Court to hear their cases; however, despite numerous requests, the Court has previously declined to intervene, even though there were circuit splits that caused different results for different individuals, depending on where they lived. What is different about these cases? Quite simply, the IRS lost, and accordingly petitioned the Supreme Court for review. Court watchers know that when the government seeks review, it is more likely to get it. (See Court Revisits Tax on Contingency Cash) The IRS has resisted these adverse rulings tooth-and-nail for years, and instructs their staff on how to interpret the adverse rulings in the most restrictive fashion (see their Field Enforcement Manual if you don’t believe me, especially Chapter 3’s “Amount to be Included in Income.“)

What does this cert grant mean? An oft-repeated maxim is that “the Supreme Court doesn’t take cases to affirm them.” From that, one could conclude that the Court is poised to overturn the precedents in Banks and Banaitis, as well as the few other precedents around the country favoring workers who receive awards. However, this isn’t always true: the Supreme Court does sometimes affirm decisions from the circuits below — even the “liberal” 9th Circuit, so we shouldn’t assume that the cert grant spells instant doom for American workers. The government obviously wasn’t petitioning to have the cases heard that it won, so the existence of the circuit split coupled with the government’s petition may have carried more weight. The Court could also be taking the case to resolve the appropriate theory for analysis, even if it were to rule in favor of workers: Banaitis’ case hinges on state attorney lien law, while Banks’ case involves the “joint venture” theory. It would certainly be preferable to win on Banks’ terms, so that it is not necessary to change the lien law in multiple states, and so that a taxpayer’s outcome is not dependent on where he or she lives, instead of the nature of their case. The Banks theory would apply to the attorney-client contingency fee relationship, which is quite common throughout the country. After Banaitis, Oregon’s neighboring state Washington has changed its lien law to protect plaintiffs, but this sort of successful outcome cannot be guaranteed everywhere.

Many groups, including NELA and Workplace Fairness, are likely to weigh in as amicus on this matter, and so we have the opportunity to have the voice of the nation’s leading experts on this issue before the Court, when the matter is briefed and argued in the months to come. Since the Court is about to stop holding oral arguments for this year’s Term, the case will be argued in the fall, with a decision coming no later than late June 2005 (and quite possibly sooner.) So will that age discrimination case, Smith v. Jackson, Miss., which will be the subject of a future blog entry.

Plaintiffs don’t have to hold their breaths until then, however; legislation exists that if passed, could render this issue irrelevant (or at least confined to a few tax years). You’ve been asked many times to contact Congress in support of the Civil Rights Tax Relief Act, and if you haven’t yet done so, this is as good a time as any. Otherwise, it is likely that in April 2004 and April 2005, many more plaintiffs will have to pay taxes while awaiting the Supreme Court ruling, when an act of Congress could resolve their problem without waiting for the Court’s decision. There currently exists an opportunity to get tax relief passed, as part of the JOBS bill currently under consideration, and while that legislation is currently stalled, it could move again at any time. So write your letter today by clicking below:

Take Action Now: Stop Taxing Discrimination Awards Unfairly!

Additional News Articles on the Supreme Court Tax Cases:

New York Times: Supreme Court to Review Tax Dispute Over Judgments

The Oregonian: High Court Accepts Tax Case from State

Dallas Morning News: High Court Will Review Taxes on Lawsuit Awards

The Recorder (subscription required): Supreme Court to Decide Two Key Employment Cases

(features quotes from Bruce Fredrickson and Angie Dalfen of NELA)

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It’s an Election Year, and Your Employer Wants You to Vote–Wonder Why?

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It’s a Presidential election year, and accordingly the politically active among us are intensifying their “get out the vote” (GOTV) efforts, which until November will operate at a fevered pitch. Especially after the 2000 election, where the nation saw a scant handful of votes decide the presidency, both political parties know the importance of getting as many individuals registered to vote as possible, and motivating those who are registered to go to the polls on Election Day. Now there’s word of a powerful new player in the GOTV world: major employers, who are disseminating information to their employees to encourage more voting. Guess whose interests those employers hope their employees’ votes will favor? That’s right: the employer.

Union groups have long been known (and feared) for their successful voter registration and GOTV efforts, which turn out many voters who support union-endorsed positions and candidates on election day. Given labor’s traditional support for Democrats, business interests, which traditionally lean more Republican, have longed for an alternative which would enable them to mobilize their own forces during elections. After successful pilot projects in 2000 and 2002, business groups may have found a solution: providing customized Web sites for workers to download voter-registration forms and apply for absentee ballots. The sites also direct company employees to other web sites that show how candidates for federal office have voted compared with the companies’ position. (See Washington Post article.)

This is a very concerted effort involving many if not most of our nation’s largest employers and business groups. Of the 150 companies that belong to the Business Roundtable, an organization representing the chief executives of the nation’s largest corporations (employing 10 million employees collectively), 99 are participating in the voter registration program this year, up from only 27 two years ago. A majority of the Association Committee of 100, a group that comprises the biggest trade associations in the country, are also operating versions of the program. The Business Industry Political Action Committee (BIPAC) plans to increase the number of companies and associations that use its voter program to at least 500 this year, up from 184 in 2002. The U.S. Chamber of Commerce says its version of the effort will be used by 129 companies and trade associations, up from 50 two years ago. Given the exponential rise in use of these types of programs, if their use is deemed successful in this fall’s election, the numbers are only certain to rise until these programs are as ubiquitous as HR departments and employee handbooks.

What’s the harm presented by these programs? After all, as Sara Lee of the California Chamber of Commerce (apparently no relation to the food conglomerate) points out, “Employers are members of communities like everyone else, so they have every right to take stands on issues and candidates.” (See East Bay Business Times article.) Well, not exactly. Federal laws prohibit companies from expressly supporting the election or defeat of candidates to their rank-and-file workers, and can only communicate on a limited basis to their senior executives. (See section 441b of the Federal Election Campaign Act.)

But what’s more, in this economic climate, the greater the chance that employees will feel coerced to support the employer’s interests, rather than their own (to the extent those interests might otherwise be very different.) After all, if you believe that your job’s at stake, as one candidate is more likely than the other to support policies affecting your employer’s industry, or if you know that you won’t get ahead in your company without wholeheartedly and enthusiasticly supporting your employer’s candidate of choice, what are you going to do? Sure, your vote in the election booth is ultimately private, but your expressions of support, verbal, financial or otherwise, may not be allowed to be private as well.

The law only offers very limited protection for employees retaliated against for their political views. Only a handful of states, such as California, New York (see sect. 201(d)) and the District of Columbia, ban discrimination on the basis of political activity or affiliation, while a scant few others prohibit discrimination based on lawful activity outside work, which could be interpreted to include political work outside the workplace. So why you might think it would be illegal for your employer to fire you for having different political views, in most cases, you would be wrong. And while it’s unlikely that an employer will fire all employees, for example, who maintain voter registrations opposite to that of the owner or president, it doesn’t seem so unlikely that some employers will find a way to retaliate against the most vocal opponents or least enthustiastic supporters of the employer’s favorite candidate or issue.

What’s the solution — other than finding a new job with a more compatible employer, which is hardly an option for most? First, it’s probably best to say as little as possible at work if you fear your political views may be a problem for your employer: there’s a reason that people are recommended to discuss politics and religion as little as possible at work. Remember that your political views, as ultimately expressed at the polls, can remain as private as you choose to keep them. Also, remember that your employer’s political interests, as a business owner, may not ultimately be compatible with your own, as an employee, so evaluate any election-related materials provided by the employer with a healthy dose of skepticism until you determine that your views and interests are compatible. There are a wide variety of groups out there who will provide election-related information in the months ahead, and so finding information compatible with your own interests and views should not be difficult to do.

While Workplace Fairness’ nonprofit status also limits what information we can provide about candidates, there will be no shortage of information available on this site about the issues likely to be the focus of this presidential election. Later this year, we will release “Workplace Fairness Now!,” designed to educate American workers on key workplace issues. Right now on our site, you can view a wide variety of news stories about the candidates’ views and statements on job-related issues at our “Eye on the Election” section of the site. And if you’re not registered to vote, you don’t need to wait for your employer to provide information: you can get the voter registration information you need right here on the Workplace Fairness website: Register to Vote.

Don’t let your employer’s interests cloud what’s best for you as an American worker: plan now to vote for the candidate who you feel will do the best job at protecting American jobs and preserving your rights as a worker.

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Last Chance: Immediate Action Needed on Overtime Proposal

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For many months now, we’ve been asking our readers to try to stop the Bush Administration’s overtime proposal. However, the dark day of its implementation is very near, and Congress has yet to take effective action preventing it from going into effect. The time is now for one last concerted effort by the American public to express outrage at the way that overtime pay is being snatched away from millions of Americans. Sen. Tom Harkin (D-IA) has proposed an amendment that will prevent the regulations from being implemented, but Congress is in a race with the clock to enact the proposal before the Department of Labor issues the regulations, which could be any day and very likely before the end of March 2004.

In our last coverage of this issue, members in the Senate had threatened to hold up a key budget appropriations bill by attaching the overtime provision, but ultimately backed down once the leading Republican ally, Sen. Arlen Specter (R-PA), gave in and ceased further opposition in the appropriations debate. Since that time, there have not been many opportunities to pass any kind of restriction. Unless this changes soon, the new overtime legislation will go into effect. Sen. Harkin’s proposed amendment is designed so that even if it goes into effect after the issuance date of the final regulations by the Labor Department, that the overtime status quo will be maintained, except as to the provisions of the proposed regulations that stand to benefit some low-income workers. However, to prevent the legal messiness that would ensue from rescinding the regulations after they take effect, Congress needs to act now, pursuant to intense pressure from the American public.

Let your member of Congress hear from you today, before it’s too late:

Take Action Now: Keep Pressuring Congress to Oppose Proposed Overtime Changes

Additional Information about Overtime:

Overview of the Harkin Amendment

Analysis of Workers Losing Overtime: White House Proposes to Eliminate Overtime Pay for 8 Million Workers

Workplace Fairness: Fair Overtime Pay

AFL-CIO: Save Overtime Pay Petition (now signed by over 500,000 Americans!)

Animated Cartoon by Mark Fiore

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References: What is Your Former Employer Saying About You?

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If you apply for a new job, chances are good that you will be asked to provide references from former employers. And while a reference may not mean what it used to, it still could mean the difference between getting a job and not getting a job. Some employers go too far, and say things that simply aren’t true about former employees, while others don’t go very far at all, as they have a company policy against disclosing anything about former employees except dates of employment. If you’re looking for a new job, it pays to know the policy of your former employers, as two recent articles in the Christian Science Monitor highlight some of the problems employees face concerning references from their former employers.

When a former employee uses a previous employer as a reference, that employer has a number of options when it comes to responding to a potential new employer. An increasing number of employers, however, have adopted a policy of only verifying employment, with job title and dates of employment the only information that can be released about former employees. (See Would You Hire This Man?). One source, J.H. Verkerke, professor of law at the University of Virginia, estimates that about 70 to 80 percent of American companies forbid employees from giving out extensive references. In many situations, this policy was borne out of actual or potential legal problems encountered by companies where the individuals giving references said too much, or occasionally too little.

Companies where those giving references convey inaccurate or deliberately misleading information have faced defamation lawsuits. One defense lawyer claims that fired workers are winning million-dollar defamation lawsuits against former employers who allegedly gave bad references. Jonathan Wilson, chairman of the labor and employment law section of Haynes and Boone LLP in Dallas, says “[i]t’s not worth the risk of litigation,” and advises clients not to offer anything but title and dates of employment. (See If An Old Boss Smears You, Hire a Detective) This prevents situations like that recounted by Heidi Allison of Allison and Taylor, where a former boss spurned by his employee after their relationship ended falsely told those calling for references that the employee was dyslexic.

And just as an employer can go too far saying bad things, an employer risks litigation by going to far to say good things about an employee which are not true. In one leading California case, a school district provided glowing recommendations regarding its former employee, Robert Gadams, a school administrator. “I wouldn’t hesitate to recommend Mr. Gadams for any position!” said a school administrator in Mendota, Calif., who also lauded Gadams’ “outstanding rapport” with students. However, this same person was alleged to have known that Gadams had given massages and made sexual remarks to female students. When Gadams went on to molest a 13-year-old girl at the new school that was unaware of his past and relied upon the top-notch recommendations when hiring him, the former school district lost a lawsuit for failing to provide accurate references. While some consider the California case an anomaly unlikely to be followed in other jurisdictions, many have concluded that it’s better to say nothing than to embellish the truth, whether it’s done positively or negatively.

However, the complete lack of a recommendation can also be problematic for both workers and employers. For example, one employer who completely failed to even verify employment faced litigation from a former bank employee who was unable to find new work in the financial services industry. Paul, a 25-year banking industry veteran recounts that he “was laid off after a corporate merger, but the bank refused to respond to requests for a reference by potential employers. No one in the banking industry would hire me without a reference, so I finally had to get a job as a substitute school teacher to pay the bills.” Paul settled with his former employer for an undisclosed sum. Those in the field claim the failure to verify employment is a common tactic. According to Michael Rankin of Documented Reference Check Inc. (DRC), “Devious ex-employers can blow you out of the job market by refusing to respond. Potential employers can’t hire nonverified applicants without risk of leaving themselves wide open for a negligent hiring suit.”

While good employees can’t get the references they need to stand out above other candidates or even receive full consideration, these policies allow bad employees to slip through the cracks. Recently, the case of Charles Cullen came to light. Cullen, a New Jersey nurse who has admitted killing as many as 40 patients with lethal drug injections, was able to continue to find new nursing jobs through his 16-year career, even though four hospitals and one nursing home fired him, another hospital suspended him, and another questioned him about a patient’s suspicious death. It was only late last year that Somerset Medical Center in Somerville, N.J., looked into questionable lab results involving patients under his care, leading to his arrest and charge with murder. While several of the facilities now face lawsuits from relatives of the murdered patients, five medical facilities in Pennsylvania were recently cleared of ethical violations, since they did launch limited background checks and reported suspicious deaths.

So what’s an employer to do? Is it truly a “damned if you do, damned if you don’t” situation? If employers who give no references are getting sued for failing to verify employment, employers who give good references are getting sued for not disclosing negative information, and employers who give bad references are getting sued for defamation, the situation may appear unduly complicated from the employers’ perspective. However, one attorney representing workers proposes a simple solution: “Call me crazy, but the truth is always a good place to start,” says Peggy Garrity of Santa Monica, California. “I do see why employers are very cautious, but the policies put a lot of wackos out there in the workplace because people don’t share information.” Another expert acknowledges that it’s still possible to give references. “If employees are careful, if they’re documenting real performance problems, and the references they give are accurate, they shouldn’t have to worry about this too much,” says Pauline Kim, professor of law at Washington University in St. Louis.

And what should employees who think they have been subjected to bad references do? One approach increasingly being relied upon is the use of reference checking services, or “career detectives.” These services will, for a fee, contact former employers to find out what is being said about an employee who is job hunting. If the reference is inaccurate, or the company fails to respond, employees know that they have a problem and can take action, such as writing their ex-employer a “cease and desist” letter demanding that the company stop giving the bad reference, or exploring the possibility of suing their employer in a defamation lawsuit. While this may not always solve the problem, it is a first step towards finding out whether your previous employer is holding you back when it comes to obtaining future employment.

For more information about reference checking services, see Allison & Taylor Reference Checking Service. If you buy one reference check, you get one free, now through April 15, by using the link above and promotion code CS (and it helps Workplace Fairness!).

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The Workplace Fairness Attorney Directory features lawyers from across the United States who primarily represent workers in employment cases. Please note that Workplace Fairness does not operate a lawyer referral service and does not provide legal advice, and that Workplace Fairness is not responsible for any advice that you receive from anyone, attorney or non-attorney, you may contact from this site.