## Facts

- United Airlines terminated Erich Schleier when he reached age 60 under a mandatory retirement policy.
- Schleier sued under the Age Discrimination in Employment Act of 1967 (ADEA), which authorizes recovery of lost wages and, for willful violations, an equal amount as liquidated damages, but does not allow compensatory damages for emotional distress or pain and suffering.
- The parties settled, with Schleier receiving backpay and an equal amount of liquidated damages.
- On his 1986 tax return, Schleier reported the backpay as income but excluded the liquidated damages; after a deficiency notice, he argued that all settlement proceeds were excludable.
- Schleier claimed the settlement was excluded from gross income under I.R.C. § 104(a)(2) as damages received “on account of personal injuries or sickness.”
- The Tax Court held the entire settlement excludable; the Fifth Circuit affirmed.

## Issues

1. Whether an ADEA settlement consisting of backpay and liquidated damages is excludable from gross income under I.R.C. § 104(a)(2) as damages received “on account of personal injuries or sickness.”
2. Whether § 104(a)(2) requires (a) a cause of action based on tort or tort-type rights and (b) damages received on account of personal injury or sickness, and whether an ADEA recovery meets those requirements.

## Decision

- The Supreme Court reversed the Fifth Circuit in a 6–3 decision.
- The Court held that no portion of Schleier’s ADEA settlement (backpay or liquidated damages) was excludable under § 104(a)(2).
- The Court applied a two-part test: (1) the cause of action must be based on tort or tort-type rights, and (2) the damages must be received on account of personal injuries or sickness.
- Backpay failed because it compensates economic loss (lost wages) and its amount is not determined by personal injury.
- Liquidated damages failed because ADEA liquidated damages are punitive for willful violations and do not compensate personal injury.
- The ADEA also failed the tort-type requirement because it lacks compensatory damages for non-economic harm.

## Legal Principles

- A recovery is excluded under I.R.C. § 104(a)(2) only if two independent requirements are met: (1) the underlying cause of action is based on tort or tort-type rights, and (2) the damages are received “on account of personal injuries or sickness.”
- The “tort or tort-type rights” requirement in the Treasury regulation is not a substitute for the statutory “on account of personal injuries or sickness” requirement; both must be satisfied.
- Backpay measured by wages lost is not received “on account of personal injuries or sickness” when the personal injury does not affect the amount recovered.
- ADEA liquidated damages are punitive and therefore are not damages received “on account of personal injuries or sickness.”
- A statutory scheme that does not permit compensatory damages for pain and suffering or emotional distress lacks a defining feature of tort-type remedies for § 104(a)(2) purposes.

## Conclusion

The Court held that an ADEA settlement for backpay and liquidated damages must be included in gross income because the ADEA claim is not based on tort-type rights as defined for § 104(a)(2) purposes and the payments were not received on account of personal injuries or sickness.


Commissioner v. Schleier, 515 U.S. 323 (1995)