Tax Legal Services · Primary-source case analysis

Schleier: ADEA Backpay and Liquidated Damages Were Taxable

By Aneeta Mishra and Timothy Chan

Published May 1, 2026

Commissioner v. Schleier shows why tax treatment follows the nature and causal basis of each recovery component rather than the label attached to a settlement.

The settlement divided backpay and liquidated damages

The taxpayer paid tax on the backpay portion of an ADEA settlement but sought to exclude the liquidated-damages portion and later claimed the entire recovery was excludable.

The exclusion imposed independent requirements

Under the then-applicable statute and regulation, the claim had to rest on tort-type rights and the damages had to be received on account of personal injuries or sickness.

Neither component satisfied the causal requirement

Backpay replaced taxable wages, while ADEA liquidated damages were punitive rather than compensatory. Neither was calculated by reference to a personal injury.

Disposition and present-day context

The Court held the entire ADEA recovery taxable. Congress later amended section 104(a)(2), so current settlement analysis must begin with today’s text and a component-by-component allocation.

Key takeaways

• Classify every settlement component separately.
• Trace what each payment replaces.
• Do not assume an employment claim creates a personal-injury exclusion.
• Apply the statutory text in force for the tax year at issue.