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August 10, 1994

GEORGE DRASE, Plaintiff,

The opinion of the court was delivered by: BRIAN BARNETT DUFF

 This is an action for refund of federal income taxes. The plaintiff, George Drase, paid federal income taxes on the award he received in settlement of an age discrimination claim. Mr. Drase claims that the settlement award was subject to exclusion from his "gross income" under § 104(a)(2) of the Internal Revenue Code, 26 U.S.C. § 104(a)(2) (1993).

 The material facts in this case are not in dispute. Mr. Drase received a payment of $ 75,000 from his former employer in settlement of a law suit filed by Mr. Drase pursuant to the Age Discrimination in Employment Act ("ADEA"), 29 U.S.C. § 621, et seq. The settlement was in a lump sum, and was not broken down into the components of Mr. Drase's claim. In his 1986 federal tax return, Mr. Drase reported $ 48,723 of the settlement, the amount he actually received after paying attorneys fees and costs.

 In March, 1990, Mr. Drase filed a claim for refund, alleging that the settlement award was tax exempt under section 104(a)(2) of the federal tax code. The Internal Revenue Service denied the refund on April 12, 1990, and this litigation ensued.

 Both parties have moved for summary judgment. The sole issue presented is a legal one: whether the proceeds from the settlement of an ADEA claim are subject to exclusion under § 104(a)(2) of the Internal Revenue Code. We find that the settlement proceeds are not subject to § 104(a)(2) and, therefore, that Mr. Drase is not entitled to a refund.


 "It is axiomatic that while taxable income should be broadly construed, exclusions to income should be narrowly defined." Kurowski v. Commissioner of Internal Revenue, 917 F.2d 1033, 1039 (7th Cir. 1990). Section 61 of the Internal Revenue Code defines "gross income" as "all income from whatever source derived." 26 U.S.C. § 61. Section 104(a) of the Code establishes an exception to the definition of "gross income" for "the amount of any damages received (whether by suit or agreement and whether as lump sums or as period payments) on account of personal injuries or sickness." 26 U.S.C. § 104(a)(2). The applicable regulation provides that § 104(a)(2) excludes damages received "through prosecution of a legal suit or action based upon tort or tort-type rights, or through a settlement agreement entered in lieu of such prosecution." 29 C.F.R. § 1.104-1(c) (1993).

 The United States Supreme Court recently interpreted § 104(a)(2) in the context of a Title VII settlement. United States v. Burke, 119 L. Ed. 2d 34, 112 S. Ct. 1867 (1992). The Burke Court found that a back pay award received in settlement of a Title VII claim is not subject to § 104(a)(2) as "damages received on account of personal injuries." 112 S. Ct. at. 1874.

 The Burke Court first focused its analysis on "the nature of the claim underlying the damages award." Id at 1872. Only compensation for "tort-type" injuries are subject to exclusion under § 104(a)(2). "A 'tort' has been defined broadly as a 'civil wrong, other than breach of contract, for which the court will provide a remedy in the form of an action for damages.'" Id. at 1870. Typically, tort plaintiffs are allowed to recover for "lost wages, medical expenses, and diminished future earning capacity on account of injury [as well as] for emotional distress and pain and suffering." Id. at 1871.

 Next, the Burke Court considered whether Title VIII's remedial scheme allowed for compensation for the "tort-type" injuries. The Court found that Title VII compensates only for "backpay, injunctions, and other equitable relief." 112 S. Ct. at 1873. *fn1" Title VII "focuses on 'legal injuries of an economic character'". Id. at 1873. "Thus, we cannot say that a statute such as Title VII, whose sole remedial focus is the award of backwages, redresses a tort-like personal injury within the meaning of § 104(a)(2) and the applicable regulations." Id. at 1874.

 Applying the two-pronged Burke test to the ADEA, we find that the Act does not address tort-type injuries. The ADEA is part of the Fair Labor Standards Act, 29 U.S.C. § 100, et seq. and specifically incorporates the remedial provisions of the FLSA. 29 U.S.C. § 626(b). The only remedies available under the ADEA, then, are equitable relief, lost wages and benefits and, under limited circumstances, liquidated damages.

 The Seventh Circuit recently considered the nature and extent of damages permitted under the ADEA, albeit not in conjunction with § 104(a)(2). Moskowitz v. Trustees of Purdue University, 5 F.3d 279, 283 (7th Cir. 1993). In Moskowitz, a professor brought a ADEA claim alleging that his employer's discriminatory actions deprived him a certain post-retirement income Professor Moskowitz could have earned, if his employer had not discriminated against him before he retired. The Court found that the ADEA's remedial provisions did not include the consequential damages sought by the plaintiff. 5 F.3d at 283.

 The ADEA's damages provision must be narrowly construed and does not provide for general tort-type remedies:

If Congress wanted to grant age discrimination plaintiffs full rights to common law damages, why did it use as its remedial template the Fair Labor Standards Act? . . . If we were to break out of the FLSA framework . . . we could not reasonably stop at postretirement income. Like other forms of tortious conduct, age discrimination can cause psychological distress but the cases hold . . . that the courts ...

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