Damage Award Taxation and Distributive Justice

Abstract

Damage awards are often intended to make plaintiffs whole, yet their tax treatment often undermines this goal. Plaintiffs frequently face unfavorable tax consequences that reduce the net value of their awards, leaving them worse off relative to the position they would have occupied absent the defendant’s wrongful conduct. Despite their significant impact, the tax costs of damage awards remain an overlooked issue in both legal scholarship and judicial decision-making.

This Article makes several contributions to the discourse on damage award taxation. First, it develops a novel taxonomy of unfavorable tax consequences, systematically categorizing the ways in which tax liabilities can undermine “make whole” remedies. While prior scholarship has primarily focused on the effects of progressive taxation in employment discrimination claims, this Article demonstrates that unfavorable tax consequences affect a much broader range of legal claims. Second, it highlights the disproportionate impact of unfavorable tax consequences on low-income plaintiffs, who are significantly more vulnerable to progressive tax rates and the loss of critical, means-tested tax benefits.

To address these concerns, this Article proposes a framework for determining when unfavorable tax consequences should warrant an increased damage award, balancing the goals of plaintiff compensation with fairness to defendants. This framework is used to address the existing circuit splits regarding the recoverability of tax-based damages in Title VII employment discrimination and breach of contract claims. By providing a principled methodology for courts to assess unfavorable tax consequences, this Article advances a more equitable and coherent approach to damage award taxation, ensuring that tax consequences do not diminish the fundamental objective of “make whole” remedies.

Keywords: tax, remedies