District Court Can Add Tax Gross Ups to Title VII Damages Awards

(Parker Tax Publishing November 2017)

The Ninth Circuit held that district courts have the discretion to award a tax gross up adjustment to compensate for the tax liability resulting from a lump sum damages award in a Title VII case. The Ninth Circuit, agreeing with several other circuit courts that have addressed the issue, found that the purpose of Title VII is to make whole the victims of employment discrimination and that the statute grants the courts considerable equitable discretion to ensure adequate compensation. Clemens v. Qwest Corp., 2017 PTC 501 (11th Cir. 2017).

In 2008, Qwest Corp. initiated disciplinary proceedings against Arthur Clemens, a longtime employee and active union member. For years, Qwest and Clemens had contested Clemens' work performance in internal proceedings and interviews, in arbitration, and before the Washington State Human Rights Commission. In 2013, Clemens sued Qwest for race discrimination and retaliation in violation of Title VII. A jury found for Clemens and awarded him over $157,000 for lost wages and benefits, $275,000 for emotional distress, and $100,000 in punitive damages. The district court reduced the latter two awards to $300,000 to comply with Title VII's cap on compensatory and punitive damages.

The district court also granted Clemens's motions for attorney's fees and, in part, an interest award. However, it denied his request for a tax gross up to compensate for the increased income tax liability resulting from the lump sum back pay award. The district court explained that a gross up was not authorized by the Ninth Circuit and noted that there was a split among other circuits on the issue. Additionally, the parties disagreed on the appropriate method for calculating the tax consequences of a lump sum payment. Clemens appealed the district court's decision to the Ninth Circuit.

Clemens argued on appeal that the lump sum award pushed him into a higher tax bracket than he would have otherwise occupied, thereby denying him the "make whole" relief to which he was entitled under Title VII. Qwest countered that monetary relief is legal, not equitable, and suggested that only a jury can award a back pay tax adjustment. Qwest also contended that the district court did exercise its discretion in refusing Clemens a tax gross up.

The Ninth Circuit held in favor of Clemens, vacated the district court's decision and remanded the case. The court noted that a split exists on whether a district court has discretion to award a tax gross up adjustment. The Third, Seventh, and Tenth Circuits have all held that district courts have such discretion. The D.C. Circuit, however, does not permit tax gross ups. In a per curiam opinion, the D.C. Circuit said that it knew of no authority for tax gross ups and found no support in existing case law for such relief.

The Ninth Circuit rejected the D.C. Circuit's reasoning. According to the Ninth Circuit, the D.C. Circuit ignored a Tenth Circuit decision, the reasoning in several Supreme Court decisions, and the equitable underpinnings of Title VII. The Ninth Circuit reasoned that the purpose of Title VII is to make whole the victims of employment discrimination and that the statute grants the courts considerable equitable discretion to ensure adequate compensation.

The decision to award a gross up, the Ninth Circuit explained, is left to the district court's discretion and depends on the circumstances of each case. There may be reasons why a district court might find an adjustment to be inappropriate, such as the difficulty in determining the proper amount or the negligibility of the amount at issue. The Ninth Circuit expressed no opinion on whether Clemens should be awarded a gross up, concluding that it was for the district court to decide on remand.

The Ninth Circuit rejected Qwest's arguments that monetary relief is legal, not equitable, and that only a jury can award a tax adjustment because those arguments were raised for the first time on appeal and because it found them to be inconsistent with controlling Title VII case law. The Ninth Circuit also rejected Qwest's argument that the district court had considered and rejected Clemens' gross up request. The Ninth Circuit described the district court's decision as somewhat opaque, but found that it was clear the district court declined to consider a gross up in part because the Ninth Circuit had never authorized one. The Ninth Circuit made clear that it was now providing such authorization.

For a discussion of the tax treatment of employment related lawsuits, see Parker Tax ¶75,910.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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