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A winning plaintiff in an age-discrimination case is entitled to a court-ordered enhancement of the jury’s verdict to compensate for the “negative tax consequences” of receiving a lump-sum award for back pay and front pay in a single year, instead of spreading the income over several years, a federal magistrate judge has ruled. In his 13-page opinion in O’Neill v. Sears Roebuck & Co., U.S. Magistrate Judge Jacob P. Hart added more than $38,000 to the jury’s verdict of $519,068. Hart, who presided over the trial in January, also added more than $14,000 in prejudgment interest, swelling the award to $571,880. In a separate 19-page opinion, Hart rejected all post-trial motions by Sears, including an argument that he should never have given the jury a “mixed motives” instruction since there was no direct evidence of discrimination. The rulings are victories for attorneys George P. Wood and Carmen Matos of Stewart Wood Branca & Matos in Norristown, Penn., who filed the suit on behalf of Richard P. O’Neill. O’Neill, 55, had worked as an appliance repairman for 22 years at the Sears Service Center when he was fired in March 1996 for going home early. But Wood argued that O’Neill was simply following a common practice among repairmen to finish their repair work for a given day and then complete paperwork at home. O’Neill was singled out for discipline because of his age, Wood said, noting that two younger workers who committed the same technical infraction were never disciplined. For proof that the decision was motivated by O’Neill’s age, Wood pointed to a telephone call in which O’Neill said his district manager, George Finlayson, asked O’Neill if he was 55 years old and if he had 20 years of service with Sears — requirements for receiving a pension. O’Neill testified that when he responded affirmatively, Finlayson then said, “Well, we decided to terminate you.” Although Finlayson himself said he did not remember the conversation, he testified that he did remember asking O’Neill if he was old enough to retire at a previous meeting. Hart found the evidence was strong enough to warrant a “mixed motives” instruction to the jury. “In this court’s opinion,” he wrote, “we found such a statement akin to other ‘quintessential’ examples of direct evidence of discrimination.” The jury found that Sears had violated both the federal Age Discrimination in Employment Act and the Pennsylvania Human Relations Act. It awarded O’Neill $106,736 in back pay, $130,596 in front pay, and $175,000 in compensatory damages under the PHRA for pain and suffering and the personal humiliation of being fired. The back-pay award was doubled by the court because the jury also found that Sears had willfully violated the ADEA, for a total verdict of $519,068. NEGATIVE TAX CONSEQUENCES After the verdict, Wood and Matos urged Hart to mold the verdict to include an award for “negative tax consequences,” arguing that such an enhancement was needed to fulfill the “make-whole” objective of the ADEA. Sears’ lawyers, Thomas C. DeLorenzo, Craig S. Hudson and Colleen Bannon of Philadelphia-based Marshall Dennehey Warner Coleman & Goggin, argued that the ADEA does not provide for such damages and that the defendant should not bear the increased tax liability to which the plaintiff’s awards for front pay, back pay, and the punitive damage awards are subject. Even if such an enhancement is warranted, they said, it should not apply to the compensatory damages. Hart found merit in both arguments. “We conclude that the plaintiff is entitled to an award for negative tax consequences, but limit the award to the increased tax liability on the award of front and back pay, only,” Hart wrote. Hart found that the 3rd U.S. Circuit Court of Appeals has never directly addressed the question — and, in fact, explicitly dodged it in Gelof v. Papineau in 1987. He also found that the Eastern District judges who have tackled it — Raymond J. Broderick, Herbert J. Hutton, and Eduardo C. Robreno — have so far denied such relief. But Hart found support for his decision in the 3rd Circuit’s 1995 decision in Starceski v. Westinghouse Electric Corp., which relied on the “make-whole” purpose of the ADEA in concluding that the plaintiff was entitled to an award of liquidated damages and prejudgment interest. In Starceski, Hart said, the 3rd Circuit held that prejudgment interest “reimburse[s] the claimant for the loss of the use of its investment or its funds from the time of the loss until judgment is entered.” That general principle, Hart said, also applies to the negative tax consequences of receiving an award of several years’ pay in a lump sum that is taxed as if earned in a single year. ‘MAKE-WHOLE’ DOCTRINE “Since the 3rd Circuit recognized the economic necessity of compensating for the lost ‘time value of money’ in order to comply with the ‘make-whole’ doctrine, we anticipate that the 3rd Circuit would likewise compensate the claimant 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,” Hart wrote. The argument is “particularly compelling in the case of front pay,” Hart said, “since the plaintiff has already had his front pay recovery reduced to present value, on the assumption that he can now invest the money and receive a yearly return equal to his lost wages. However, if the plaintiff must pay a higher tax on the present value of his earnings, this leaves less for investment. Hence, the plaintiff will not, in fact, realize an investment gain large enough to equal the future wages that he is not getting as a result of the defendant’s discriminatory conduct.” The goal of the ADEA, Hart said, “is to allow plaintiff to keep the same amount of money as if he had not been unlawfully terminated.” Achieving that goal, he said, “requires reimbursement for the reduced amount of front pay money that the plaintiff has to invest as a result of higher taxes, as well as reimbursement for the higher taxes he must pay on his back wages caused by getting this money in a lump sum.” Hart said his decisions did not contradict the other cases in the Eastern District because O’Neill’s case was “distinguishable from those previously decided.” Hutton’s decision, he said, pre-dated the taxability of the award, and Broderick’s decision came in a case decided after the Internal Revenue Code had been amended to include such awards as ordinary income. Broderick based his denial on the fact that the plaintiff had failed to present any testimony by a tax expert calculating the negative tax consequences. Robreno relied on that ruling to do the same. Robreno’s case, Becker v. ARCO, was appealed, but the 3rd Circuit never reached the question because it reversed on other grounds. But in O’Neill’s case, Hart said, the plaintiff’s lawyers “remedied the defect cited by Judge Broderick by presenting the opinion and calculations of Andrew Verzilli, the economic expert whose testimony the plaintiff presented at trial.” Having concluded that negative tax consequences are an appropriate remedy, Hart turned to the question of how to apply the remedy to each component of damages awarded by the jury. Wood and Matos argued that the defendant should bear the increased tax burden to which the entire award is subject. But Sears argued that the compensatory and liquidated damages awarded by the jury should not be considered in calculating such an award. Hart agreed with the defense lawyers, saying the plaintiff had focused on the taxability of the other components of the award — the compensatory and liquidated damages. “Although the court agrees that those components of the award will also be subject to taxation, the plaintiff’s counsel loses sight of the ‘make whole’ rationale behind the ADEA, upon which he relied in arguing for an award for negative tax consequences, in the first place,” Hart wrote. O’Neill, he said, would have earned the back pay and front pay if Sears had not unlawfully terminated him. As a result, he said, he is entitled to receive the value of front pay and back pay that he would have received over his work life. “That value is diminished when the lump sum is taxed at a higher level. Therefore, in order for Mr. O’Neill to be made whole, he is entitled to an award of the negative tax consequences on the backpay and front pay portions of the jury’s award.” But the compensatory and liquidated damages “are only a product of this lawsuit,” Hart said. “Mr. O’Neill would not have received these sums but for the defendant’s discriminatory action. Hence, allowing the plaintiff to recover the increased tax he will have to pay on these sums does more than make him whole. It gives the plaintiff a windfall.”

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