Does the Tax Code Believe Women?: Reexamining 26 USC § 104(a)(2) in the #MeToo Era

Since 1918, the tax code has included 26 USC § 104(a)(2), an exclusion from gross income for civil lawsuit damages for “personal injuries or sickness.” In 1996, by adding one word—“physical”—to the provision (twice), Congress narrowed the exclusion’s scope dramatically. Now, damages compensating for a broken arm (a “personal physical injury”) are tax-free, but those arising out of claims for, say, sexual harassment or race discrimination are fully taxable. Such injuries, the statute says, are insufficiently “physical” to merit exclusion from income.

Using the recent #MeToo movement as a jumping-off point and borrowing the language and methodologies of feminist legal theory, this Comment scrutinizes the ways in which § 104(a)(2) systematically disadvantages the people most likely to bring such harassment and discrimination claims—female and minority taxpayers. By analyzing every § 104(a)(2) Tax Court case in the past decade, I first find quantitative support for the proposition that female and minority taxpayers are indeed disproportionately impacted by § 104(a)(2). With this on-the-ground impact in mind, I then critically analyze the doctrines courts use to apply § 104(a)(2), highlighting inconsistencies in the provision’s application that impose an additional layer of costs on these same disadvantaged taxpayers. In an effort to resolve these inconsistencies, I propose two classes of solutions. First, I suggest a number of tactical and interpretive strategies that lawyers and judges can employ to ensure the provision is applied more equitably. And second, I recommend an amendment to § 104(a)(2) that would equalize its disparate impacts and align it more closely with Congress’s stated purposes for enacting it. These solutions would help bring the policy expressed by § 104(a)(2) more closely in line with the priorities of the society that must abide by it.