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The concept of “negative tax consequences” was first recognized in the Eastern District of Pennsylvania in the 2000 decision O’Neill v. Sears, Roebuck and Co. In O’Neill, the court found that the plaintiff, who had successfully sued for age discrimination, was entitled to recover an award for increased tax liability associated with receiving a lump-sum recovery, rather than having the tax liability spread out over a number of years. One other court in the Eastern District has applied the O’Neill concept of “negative tax consequences” since 2000. The recent decision of Tomasso v. The Boeing Co. specifically refused to award an increased recovery for the fact that the successful plaintiff would receive his award in one check, rather than spread out over time. Joseph Tomasso claimed that Boeing discriminated him against on the basis of his age. Following a five-day jury trial, the jury found in his favor and awarded him $261,539 in back pay and an additional $113,200 in front pay. Liquidated damages were also awarded. Following the verdict, Tomasso, through his attorneys, filed a motion to mold the verdict to include prejudgment interest and an increased amount for “negative tax consequences.” Little Appellate Guidance The court began its discussion of “negative tax consequences” by noting that the 3rd U.S. Circuit Court of Appeals has not specifically addressed the issue. However, in a recent non-precedential decision, Gibson v. City of Paterson, the 3rd Circuit noted that the “very few cases discussing this issue have found such treatment appropriate only when damages are for back pay, resulting in disparate tax treatment between those wages, had they been paid when owed, and their payment in a lump sum.” In Gibson, the damages awarded were for emotional pain and anguish and, therefore, the receipt of a lump sum award did not prejudice the plaintiff. The only other 3rd Circuit decision referencing tax consequences was Gelof v. Papineau, in which the defendant conceded that “the judgment should properly include the negative tax impact of a lump sum payment as an element of damages.” As such, the court did not need to address “the question of whether such an award should be made in all back pay cases.” As noted, O’Neill is the touchstone of “negative tax consequence” jurisprudence. In that decision, the court looked to decisions awarding prejudgment interest, which is discretionary to the court, and found that the “make-whole” purpose of the ADEA remedy scheme entitled the plaintiff to compensation “for the depletion of that money due to the increased taxes to which the award is subject on account of its being received in a single tax year, rather than being spread out over time.” The O’Neill court distinguished a number of decisions denying such an increase – specifically the case of Shovlin v. Timemed Labeling Sys. Inc. – on the grounds that the plaintiff had failed to present any testimony from a tax expert calculating the tax implications of the lump-sum award. In Tomasso, the plaintiff, like the one in O’Neill, provided an expert estimate of the proposed negative tax consequences. The court found, however, that Tomasso did not need the additional compensation in order to be made whole under the statute. Furthermore, “absent express direction from the 3rd Circuit that damages should be awarded to compensate a plaintiff for the negative tax consequences from an ADEA back-pay award,” the court refused to award such relief. Prejudgment Interest Awarded As noted, Tomasso also sought prejudgment interest on the jury’s award. In this respect, he was more successful, as the court found that there is a strong presumption in favor of increasing an award in this respect absent “unusual equities.” In this case, Boeing argued that Tomasso had already received a double recovery, since he had been allowed to collect both pension and back pay for the same period when he was also receiving unemployment compensation. The court rejected this argument, finding that “just as unemployment compensation and pension benefits are not to be deducted from a back-pay award in order to preserve the ADEA’s goal of make-whole relief, such benefits should not be utilized to offset an award of prejudgment interest.” In light of the presumption in favor of a prejudgment interest award, Boeing failed “to provide a credible reason why it would be inequitable to award [such] interest.” While the law on prejudgment interest seems settled, there is no consensus on increasing a damages award for negative tax consequences. Computer research indicates that the phrase “negative tax consequences” has been used almost exclusively in connection with the O’Neill line of cases in the Eastern District of Pennsylvania. The concept seems not to even been discussed by other courts. It is, however, clearly “in play” in the 3rd Circuit, and it is reasonable to believe that the appellate court will give specific guidance in the near future. SID STEINBERG is a partner in Post & Schell’s business law and litigation department. He concentrates his national litigation and consulting practice in the field of employment and employee relations law. Steinberg has lectured extensively on all aspects of employment law, including Title VII, the FMLA and the ADA.

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