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When a Chicago police officer won a sexual harassment suit this summer, her award did not go unnoticed. After the judge reduced the award from $3 million to $300,000, and granted her lawyer nearly $1 million in fees, the plaintiff ended up owing the government $400,000 in taxes — $100,000 more than her actual award. The seemingly absurd outcome epitomizes a situation that employment lawyers have long decried: While physical injury awards are completely tax exempt, awards for emotional distress are subject to what employment lawyers say are ill-conceived and burdensome tax rules. And since attorney fees are usually considered part of the award, plaintiffs end up paying taxes on money that they never even see. Over the past few months, the employment bar has redoubled its efforts to get a bill passed that it says will fix the problem. But with Congress set to adjourn in a few weeks, employment attorneys might see their top legislative cause passed over once again. “For employment lawyers it’s a very big issue,” says Paula Brantner, program director at Workplace Fairness, the sister organization of the National Employment Lawyers Association. “It comes up in pretty much every employment case.” The NELA, a plaintiffs-side employment attorney group, is the primary backer of the Civil Rights Tax Relief Act, as the bill is known. The bill also has the backing of the American Bar Association’s Labor and Employment Section, the U.S. Chamber of Commerce and other organizations on both the plaintiffs-side and defense-side of the bar. While the bill has failed to gain traction in Congress for the past five years, employment attorneys are hoping this year will be different. Thanks in part to the publicity generated by the Chicago police officer’s case, support for the bill this year is stronger than ever. According to NELA, the bill has 111 co-sponsors in the House of Representatives and 38 sponsors in the Senate. On Monday and Tuesday, the group is organizing a pair of lobby days in which about 80 attorneys and plaintiffs will convene on Capitol Hill to meet with members of Congress. For employment attorneys, the bill would end an unwelcome situation that was created by the 1996 Small Business Job Protection Act signed by President Clinton. That act increased the minimum wage, but, among other things, made taxable all awards for nonphysical injuries that result from discrimination. This has had a big effect on employment cases, because workplace harassment and discrimination claims typically involve emotional distress injuries rather than physical injuries. Employment attorneys like to point out that someone who slips and falls as a result of mere negligence benefits from a tax exemption, but someone who was intentionally discriminated against must pay Uncle Sam. “It’s kind of an odd thing that when somebody gets compensated for what they’ve gone through, the government gets a share,” says Leslie Levy, a plaintiffs attorney at Oakland’s Boxer & Gerson who says she’s written several letters to Congress in support of the bill. Also at issue is what some call the double taxation of attorneys fees. Not only do plaintiffs pay taxes on the fee, but the lawyers do as well. Plaintiffs who opt to deduct the attorneys fees from their income trigger the Alternative Minimum Tax, which has equally onerous tax consequences. The Civil Rights Tax Relief Act, or HR 840 and S 917 as it’s dubbed in the House of Representatives and Senate respectively, seeks to eliminate attorneys fees and emotional distress awards from an individual’s gross income. It also would average back-pay awards, so that plaintiffs who receive multiple years of back pay in one lump sum don’t get knocked into a higher tax bracket. Of course, the bill’s broad support among employment attorneys owes as much to pragmatism as it does to altruism. The current rules make out-of-court settlements more difficult, since a plaintiff needs to negotiate for more money to make up for the tax losses. “When you start to slice it away there’s not a lot left for the person who has the claim,” says Wilson Sonsini Goodrich & Rosati employment attorney Fred Alvarez. “It’s made it a huge challenge,” says Mark Rudy, an employment attorney at Rudy, Exelrod & Zieff and a neutral mediator. “It’s hard to convince people to settle when they get only 20 percent of the settlement amount.” In a recent dispute that Rudy mediated, a settlement unraveled over tax issues after the parties had worked for 10 hours to reach an agreement. “They’re going to spend a tremendous amount of time and money to try a case that could have been settled,” says Rudy. But even with employment attorneys of all stripes clamoring for change, and no organized opposition to it, the Civil Rights Tax Relief Act is hardly a sure thing. Thomas Klein, an Oakland employment solo, believes the timing isn’t right. “The country is at war, we’re running large deficits, and I think any legislation that seeks to reduce tax revenues may be very hard to sell,” says Klein. The estimated 10-year revenue loss from passing the act is $586 million — a tiny sum in an annual budget that’s measured in trillions, but not insignificant in a time when the government needs money. And since the bill is so small and specialized, says Brantner, it needs to find a broader piece of legislation to piggy-back on. “It’s the kind of thing that doesn’t pass as a stand-alone bill,” Brantner says. “It has to be lumped in with some larger tax package, and there haven’t been a lot of those lately.” The most promising candidate right now is the Small Business and Farm Economic Recovery Act of 2002, which is expected to be heard in the Senate Finance Committee in the next couple of weeks. While Sens. Charles Grassley, R-Iowa, and Jeff Bingaman, D-N.M., have vowed to introduce the legislation, it’s unclear if the committee chair — Sen. Max Baucus, D-Mont. will allow additions to the bill, let alone whether the bill will pass. Still, Brantner is optimistic that the bill will eventually get its break before Congress adjourns. “We’re not giving up until they go home,” she says. “And once they go home we’ll be working to build support for the next session of Congress.”

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