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The Supreme Court on Monday agreed to resolve two key employment law issues that have divided lower courts for years. One pair of cases will test the government’s policy that calls for both the client and the lawyer to pay taxes on the portion of employment discrimination damage awards paid to the lawyer. The other question taken up on Monday stems from the Age Discrimination in Employment Act: Can plaintiffs use the act to bring suits that claim disparate treatment in the workplace? Courts have previously ruled such suits are permissible under Title VII of the Civil Rights Act of 1964. The cases granted Monday will be argued in the fall. The tax cases, Commissioner of Internal Revenue v. Banks, No. 03-892, and Commissioner of Internal Revenue v. Banaitis, No. 03-907, ask whether the contingent-fee portion of an award should be treated as taxable income to the client. The fee is already taxed as income to the lawyer. The government argues the client should also be taxed. But in both cases now before the Supreme Court, the government lost, in rulings by the U.S. Court of Appeals for the 6th Circuit and the 9th Circuit. In asking for high court review, Solicitor General Theodore Olson noted that other court panels in the 4th, 7th, 9th, and 10th Circuits have ruled for the government, creating “widespread and irreconcilable conflict.” In the Banks case, the 6th Circuit said that Joseph Banks did not have to pay taxes on the $150,000 lawyer fee portion of a $460,000 settlement in a discrimination suit against the state of California. In the Banaitis case, Sigitas Banaitis successfully challenged IRS efforts to tax the $3.8 million contingent fee that went to his lawyer from a $8.7 million damage award against Mitsubishi Bank. The Court’s action is a “big development” in the ongoing controversy over the “double taxation” of contingent fee money, said Bruce Fredrickson, a partner at D.C.’s Webster, Fredrickson & Brackshaw who has been monitoring the issue for the National Employment Lawyers Association, which advocates for employees. The IRS policy is “wrong and unfair,” said Fredrickson. “Clients are taxed on money that never comes to them.” Typically in employment cases, when a settlement is reached, the portion that goes to the lawyer is sent directly from the employer to the law firm, never passing through the client’s account. The tax does not apply in cases of damages for personal injury, which the tax code specifically exempts from taxation. Angie Dalfen, a staff attorney at NELA, said the tax bill is “often a real blow at the end of a long litigation. You may win and end up owing money.” Fredrickson said both civil rights groups and business organizations advocate a change in the policy because it often makes it harder for both sides to settle employment cases. The Civil Rights Tax Relief Act (H.R.1155) now pending before Congress would eliminate the clients’ tax liability. In the age discrimination case, Smith v. City of Jackson, Miss., No. 03-1160, the Court is asked to decide whether disparate impact claims are cognizable under the ADEA. A group of Jackson police officers claim that a new city salary policy disadvantaged workers over 40 who are protected by the age discrimination law. But the District Court and the 5th Circuit dismissed the claims, ruling that the ADEA does not allow for disparate impact claims. The 5th Circuit ruling is in line with rulings by the 1st, 7th, 10th, and 11th Circuits, but in opposition to decisions from the 2nd, 8th, and 9th Circuits. The high court was expected to resolve the conflict in the 2001 case Adams v. Florida Power Corp., but it was dismissed without explanation. Thomas Goldstein of D.C.’s Goldstein & Howe, who represents the police officers, stated that the ADEA uses “precisely the same language” as Title VII, so the same standard for disparate impact claims should prevail. He also said the circuit split is “untenable,” adding, “As long as the circuits disagree, police officers in Jackson, Missouri (within the 8th Circuit) are protected against policies that disproportionately affect older employees, whereas officers in Jackson, Mississippi (within the 5th Circuit) are not.” Goldstein’s brief was the product of a Supreme Court litigation clinic at Stanford Law School launched earlier this year by Goldstein and law professor Pamela Karlan. The seven students in the clinic have already collaborated on three high court petitions and several other opposition and amicus curiae briefs in pro bono cases.

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