Whistleblower Protection Blog : Whistleblower Lawyer & Attorney : National Whistleblower Legal Defense and Education Fund : Whistleblower Protection, Fraud Claims : Washington DC

On January 23, 2012, the Internal Revenue Service (IRS) issued a final regulation that reflects a 1996 law making payments for emotional distress damages taxable as income. The new regulation, cited as 26 CFR 1.104-1(c), makes clear that settlements and awards are taxable unless they are "attributable to a physical injury or physical sickness." The regulation also restates an exclusion from income for those portions of emotional distress damages that do not exceed the amount actually paid for medical care.  So, if a whistleblower can show the amount actually paid for treatment of emotion distress, that portion of a settlement up to that amount can be excluded from income. The full text of the new regulation is available through this link, or in the continuation of this blog entry.

This new regulation emphasizes the need for the bipartisan Civil Rights Tax Relief Act (CRTRA), H.R. 3195, sponsored by Representatives John Lewis (D-GA) and James Sensenbrenner (R-WI), and S. 1781, sponsored by Senators Jeff Bingaman (D-NM) and Susan Collins (R-ME). The CRTRA will exclude all emotional distress damages from the calculation of taxable income, and will allow victims of discrimination and retaliation to use income averaging to avoid the elevated tax rate that can apply to receiving several years of backpay at one time. Advocates are currently working with the Joint Taxation Committee to compute the actual cost of these proposals.

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Representatives John Lewis (D-GA) and James Sensenbrenner (R-WI) introduced the Civil Rights Tax Relief Act in 2009. This bill would provide that compensatory damages awarded in whistleblower and other cases would be excluded from the definition of “income” for income tax purposes, just as other personal injuries are excluded. The Civil Rights Tax Relief Act will also permit whistleblowers and civil rights plaintiffs to pay taxes based on the tax rates of the years the wages would have been earned but for the unlawful discrimination.

They have now reintroduced this bill as the Civil Rights Tax Relief Act of 2011, H.R. 3195. Last week, Senators Jeff Bingaman (D-NM) and Susan Collins (R-ME) introduced a companion bill, S. 1781.

This bill has positive outcomes for both employers and employees. The CRTRA will help employers by reducing the costs of employment and civil rights litigation by enabling more cases to be settled before trial. This will free up valuable court time for other cases. It also helps the employees by not requiring that they pay taxes on non-economic damages.

"The reintroduction of the CRTRA in both the House and the Senate is an excellent development and a great opportunity for Congress to level the playing field for employment plaintiffs who have to deal with illegal discrimination and pay higher taxes on their settlements or awards. We laud all the sponsors and look forward to making the CRTRA law," stated Bruce A. Fredrickson, who guided advocacy for the CRTRA on behalf of the National Employment Lawyers Association (NELA).

This bill failed to pass in the last session of Congress, but has the potential to pass this time around if enough people contact their representatives to advocate for it!

Intern Sravani Nichanamatlu wrote this blog entry.

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The Swiss parliament finally approved the deal made between UBS and the U.S. government that requires UBS to turn over the names of 4,450 U.S. citizens who held accounts at the Swiss bank. The NWC issued the following release:

 

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This Sunday's Washington Post featured an article that details Bradley Birkenfeld's actions as a whistleblower, and how those actions landed him in federal prison. The article discusses the contradictory messages sent to potential whistleblowers by the U.S. government:

Birkenfeld's story turned into a cautionary tale for would-be informants and a test of the U.S. government's attitude toward them. Should people who come forward with inside knowledge of a crime be rewarded, punished -- or both? Can the government simultaneously woo such whistleblowers with financial enticements and threaten them with incarceration?

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Albert D. Campbell worked for Lockheed Martin from 1981 to 1995. He worked as a financial analyst, and was promoted in 1989 to chief of cost control for the $3.5 billion LANTIRN project. The LANTIRN project built navigation and targeting pods for fighter jets. Between 1993 and 1995, Campbell used sophisticated analytic exercises to show that LANTIRN was wasting millions of dollars in non-productive costs.  Company management warned him that it would be career suicide to raise these concerns. In 1995, Campbell filed two qui tam whistleblower suits under the False Claims Act (FCA) against Lockheed Martin, alleging that the company had defrauded the federal government. The government intervened in one case, and in 2003, Lockheed Martin entered into a settlement of both claims. Campbell received a reward of $8.75 million from the government.  This reward was paid to his attorneys who deducted their fee of $3.5 million and then paid $5.25 million to Campbell. Instead of reporting this income and paying taxes on it, Campbell filed a "disclosure" of the reward, but paid no tax. Campbell did not consult with a tax attorney, but prepared and filed his own tax return. When the IRS disagreed with this tax position, Campbell claimed that his reward was not taxable income, but rather an assignment of the government's non-taxable fraud recovery.  The Tax Court has disagreed. While the government had no duty to pay tax on its recovery, the reward to Campbell was income to him, and taxable.  The Tax Court did allow Campbell to deduct the $3.5 million paid to his attorneys. For the other $5.25 million, Campbell now has to pay taxes, and also a penalty for asserting a position that had no reasonable basis. The case is Albert D. Campbell v. Commissioner, 134 T.C. No. 3 (January 21, 2010). Campell testified to a House Committee about his support for FCA amendments. It is too bad that the government could not be content with collecting the taxes and interest due. Imposing a penalty on the whistleblower works a disservice to the goal of encouraging knowledgeable officials to come forward with information that will actually save the taxpayers money. Given that this decision now requires whistleblowers to pay taxes on qui tam rewards, it would be wise for whistleblowers getting such a reward to hire a good tax attorney to prepare their return.

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The Internal Revenue Service (IRS) is now considering a proposed regulation that would expand the types of personal injury compensations that are exempt from income tax.  The proposed rule would eliminate the requirement that compensation be paid as part of a tort remedy.  However, the proposed rule would not go so far as to make clear that compensation for enduring a hostile work environment would be exempt, as noted in a comment submitted this week by Bruce Frederickson of the National Employment Lawyers Association (NELA).

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When whistleblowers win their cases, it is often years after they got fired.  When a judge adds up all the years of back pay, the whistleblower will then have to pay taxes from a higher tax bracket. Whistleblowers can end up getting less than what would have happened had they never been fired.

Last month, the federal Third Circuit Court of Appeals recognized this problem and allowed a court to increase a plaintiff's award to compensate for the negative tax consequence of getting back pay in a lump sum.  The decision is Eshelman v. Agere Systems, Inc., No. 05-4895 (3d Cir. Jan. 30, 2009). The decision highlights the need for the Civil Rights Tax Relief Act.

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Back in April, when the Supreme Court denied certiorari for Murphy v. IRS, a lot of people were upset. Whistleblowers and other civil rights leaders knew that the DC Court of Appeals' terrible opinion (ruling that the 16th Amendment of the Constitution gives government the power to tax court-awarded compensatory damages as if they were income) was a slap in the face to victims of discrimination. We knew that this ruling would be a disincentive for people to blow the whistle or report civil rights violations.

We are finding out that we aren't the only ones who disagreed with the decision. There are a lot of scholars out there who feel that income tax itself is illegal under the Sixteenth Amendment, and they are speaking up as well. One of these individuals is a state representative from Ohio named Phil Hart, who wrote this article on the Murphy decision. Although Mr. Hart disagrees with the DC court for different reasons than the whistleblower/civil rights community, his article rightly points out how the "Murphy Court" disgracefully bowed to political pressure when they flip-flopped from their original decision (which was in favor of Ms. Murphy) to a more pro-government stance. 

 

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Although the Supreme Court refused to hear the case of Murphy v. IRS, the fight is not over! The National Whistleblower Center has issued this Action Alert, urging all supporters to email their Senators and Representatives and tell them to support the Civil Rights Tax Relief Act of 2007.

Click here for more info>>

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In an order posted today on the its website, the U.S. Supreme Court announced that it will not be hearing the Murphy v. IRS appeal. Although this is a disappointing turn of events, whistleblower and civil rights advocates should continue the fight for tax justice, both in other judicial venues, and in the halls of Congress.  

In response to the news, the National Whistleblower Center put out the following press release:

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