The appellant Frank E. Rickel ("the taxpayer")1 received $80,000 from his former employer in 1983 and $25,000 in 1984 pursuant to a settlement of his Age Discrimination in Employment Act ("ADEA") lawsuit. This appeal requires us to decide whether the United States Tax Court properly determined that one-half of this settlement represented taxable income. Because we conclude that the entire settlement amount is excludable under 26 U.S.C. Sec. 104(a)(2)2, we will reverse the order of the Tax Court.

The relevant facts of this case are not contested. The taxpayer was employed by Malsbary Manufacturing Company ("Malsbary"), Uniontown, Pennsylvania, as a general sales manager. In March 1979, when the taxpayer was 56 years old, the position of president opened up at the company. Despite the taxpayer's qualifications and past suggestions from company officials that the taxpayer would be considered for the post, the company hired a much younger individual as president.

Subsequently, the new president told the taxpayer that he wanted someone younger for the position of general sales manager. The taxpayer was thereafter relieved of his position in favor of a 37 year old individual, placed on partial pay, and eventually discharged on December 31, 1979.

After receiving a right to sue letter from the EEOC, the taxpayer brought suit in federal court against Malsbary and its parent, Carlisle Corporation ("Carlisle"), alleging a violation of the ADEA, 29 U.S.C. Secs. 621-634 (1982). The taxpayer's amended complaint contained the following prayers for relief:

A. Order defendants jointly and/or severally to employ the plaintiff as President of Malsbary; or in the alternative to reinstate plaintiff to his former or a comparable position;

B. Order the defendants jointly and/or severally to pay back wages, benefits and other compensations found by the Court to be due plaintiff, together with interest thereon from the date when such amount became due;

C. Grant a judgment requiring defendants jointly and/or severally to pay appropriate back wages and an equal sum as liquidated damages, to plaintiff who has been adversely affected by the unlawful employment practices described herein;

D. Award counsel for plaintiff reasonable attorney's fees and expenses;

E. Award any further relief which is appropriate and proper under the circumstances.

App. at 58-59.

The taxpayer's action was tried before a jury in a bifurcated trial. The jury first heard evidence on the issue of liability. After the testimony, four interrogatories were submitted to the jury for their consideration:

(1) Was plaintiff ... qualified in April 1979 for the position of President of Malsbary ...?

(2) Was age a determinative factor in the decision not to promote the plaintiff?

(3) Was plaintiff ... qualified in August 1979 for the position of General Sales Manager of Malsbary ...?

(4) Was age a determinative factor in the decision to discharge the plaintiff from his job as General Sales Manager?

App. at 86.

While the jury was deliberating, the parties reached a settlement. The specific terms of the settlement depended upon the jury's answers to the interrogatories. When the jury answered all the questions affirmatively, the defendants were obligated to pay the taxpayer $80,000 immediately and $25,000 during each of the next four years. The settlement agreement did not allocate the settlement amount among the taxpayer's various prayers for relief.

Carlisle made the first payment of $80,000 in 1983, and paid $25,000 during each of the succeeding four years.3 Only the receipt of $80,000 in 1983 and $25,000 in 1984 are at issue in this appeal. Carlisle did not withhold Federal income or Social Security tax from any of the payments. The taxpayer neither reported the $80,000 or the $25,000 as gross income nor disclosed these amounts on his 1983 and 1984 tax returns.

In a statutory notice of deficiency, the Commissioner of the Internal Revenue ("Commissioner") determined that the entire amount of $105,000 was taxable income. The Commissioner argued that the settlement proceeds represented either back pay or punitive damages, both of which the Commissioner asserted were taxable items of income. The taxpayer petitioned the Tax Court seeking a redetermination of the deficiency.

After a trial, the Tax Court found that one-half, i.e. $40,000 in 1983 and $12,500 in 1984, of the settlement was taxable income. The Court found that the other half of the settlement was excludable under Sec. 104(a)(2). In addition, the Tax Court also denied the taxpayer's motion for reasonable litigation costs. This appeal followed. We have jurisdiction over taxpayer's appeal pursuant to 26 U.S.C. Sec. 7482(a).

The Internal Revenue Code ("IRC") states that "[e]xcept as otherwise provided ..., gross income means all income from whatever source derived...." 26 U.S.C. Sec. 61(a). Accordingly, any accession to wealth is presumed to be gross income, unless the taxpayer can demonstrate that the accession fits into one of the specific exclusions created by other sections of the IRC. Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429-30, 75 S. Ct. 473, 475-76, 99 L. Ed. 483 (1955).

The exclusion at issue here is Sec. 104(a)(2) which reads in relevant part: "gross income does not include ... the amount of any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or sickness...."4 Since the appropriate question to ask for purposes of Sec. 104(a)(2) is whether the damages were received on account of personal injuries, Threlkeld v. Commissioner, 87 T.C. 1294, 1305 (1986), aff'd, 848 F.2d 81 (6th Cir.1988) (full Tax Court), it is important to determine exactly what the term "personal injuries" means for the purposes of the IRC.

Unfortunately, neither the statute, Treasury regulations nor legislative history provides much guidance. Id. However, it is judicially well-established that the meaning of "personal injuries" in this context encompasses both nonphysical as well as physical injuries. Bent v. Commissioner, 835 F.2d 67, 70 (3d Cir.1987); Roemer v. Commissioner, 716 F.2d 693, 697 (9th Cir.1983); Threlkeld, 87 T.C. 1297; Seay v. Commissioner, 58 T.C. 32, 40 (1972). See generally, L. Frolik, Federal Tax Aspects of Injury, Damage, and Loss 59 (1987). In addition, the Treasury regulations narrow the scope of excludable "damages" to "an amount received ... through prosecution of a legal suit or action based upon tort or tort type rights, or through a settlement agreement entered into in lieu of such prosecution." 26 C.F.R. Sec. 1.104-1(c) (1989). See generally Threlkeld, 87 T.C. 1297. Thus, "[t]he essential element of an exclusion under section 104(a)(2) is that the income involved must derive from some sort of tort claim against the payor." Glynn v. Commissioner, 76 T.C. 116, 119 (1981), aff'd without published opinion, 676 F.2d 682 (1st Cir.1982). See also Byrne v. Commissioner, 883 F.2d 211, 214 (3d Cir.1989) ("As defined by the relevant regulation, personal injury claims assert violations of 'tort or tort type rights' "). Accord Threlkeld, 87 T.C. 1305.

Consequently, the Tax Court has long held that "[i]f a taxpayer receives a damage award for a physical injury, which almost by definition is personal, the entire award is excluded from income [under Sec. 104(a)(2) ] even if all or part of the recovery is determined with reference to the income lost because of the injury." Threlkeld, 87 T.C. 1300. The compensation is exempt whether paid for earnings lost prior to the award or settlement, or for expected future earnings. Frolik, supra p. 658, at 9. As one commentator has explained:

Compensation [in the physical injury context] for loss of earnings is excludable even though the lost earnings would have been taxable if earned. Suppose, for example, that a taxpayer is tortiously injured, sues, and settles for $5,000, which is allocated $1,000 for pain and suffering, $2,000 for medical expenses, and $2,000 for wages lost prior to the settlement. Under Sec. 104(a)(2), the entire $5,000 is tax exempt. Of course, if the taxpayer had not been injured and had actually earned the $2,000 in wages, that money would have represented an addition to gross income. Injured taxpayers who recover lost earnings are better off, in terms of taxes, than they would have been if they had not been injured.

Id.

However, the Tax Court has long treated claims for nonphysical personal injuries quite differently. In the nonphysical injury context, before deciding the tax consequences of an award or settlement, the Tax Court has mounted an initial inquiry to determine whether each of the components of the injury are personal or nonpersonal. Threlkeld, 87 T.C. 1300. For example, if some of the damages received for the nonphysical injury are for mental or physical strain or personal embarrassment, then that portion of the recovery is excludable; yet if some of the damages are recovered for economic or professional losses, e.g., back pay or lost income, then that portion of the recovery is taxable income. See, e.g., Coats v. Commissioner, 36 T.C.M. (CCH) 1650 (1977); Hodge v. Commissioner, 64 T.C. 616 (1975). See generally Frolik, supra p. 658, at 60-62.

The different treatment of physical and nonphysical personal injuries has sometimes led to tortured analyses and arbitrary results. Finally, in Roemer v. Commissioner, 716 F.2d 693 (9th Cir.1983), the Court of Appeals for the Ninth Circuit rejected this dual approach. In Roemer, the taxpayer, a successful independent insurance agent, brought a defamation suit against a credit agency which had misrepresented his credit history to various insurance companies. Id. at 695. After a trial in which the jury was told that the taxpayer had lost $135,000 in prospective income as a result of the defamation, the jury awarded him $40,000 in compensatory damages. Id. The taxpayer did not report the entire amount of the award as gross income and the Commissioner issued a notice of deficiency. Id.

The Tax Court determined that the taxpayer had not proven that the damages were in compensation for personal losses, e.g., personal embarrassment or damage to his personal reputation, rather than injury to the taxpayer's business or professional reputation, i.e., economic loss, and therefore the entire amount was taxable. Id. The Roemer court disagreed, noting that the only distinction found in Sec. 104(a)(2) was between personal and nonpersonal injuries, not physical and nonphysical injuries. Id. at 697. The court explained further that:

Th[e taxpayer's] injury ... should not be confused with the derivative consequences of the defamatory attack, i.e., the loss of reputation in the community and any resulting loss of income. The nonpersonal consequences of a personal injury, such as a loss of future income, are often the most persuasive means of proving the extent of the injury that was suffered. The personal nature of an injury should not be defined by its effect.

Id. at 699. Since defamation was a personal injury under California law, the court held that all the compensatory damages received by the taxpayer as a result of the injury were "excludable from gross income under Sec. 104(a)(2), as would be the compensatory damages received on account of any personal injury." Id. at 700.

After Roemer was decided the full Tax Court, in Threlkeld v. Commissioner, 87 T.C. 1294 (1986), aff'd, 848 F.2d 81 (6th Cir.1988), accepted the reasoning of the Ninth Circuit in a 15-1 vote. Conceding that their differing treatment of physical and nonphysical injuries in the past was "analytically irreconcilable," id., at 1301, the Tax Court held that:

The Court of Appeals [in Roemer ] viewed the problem of recoveries for defamation from the proper perspective. Section 104(a)(2) excludes from income amounts received as damages on account of personal injuries. Therefore, whether the damages received are paid on account of "personal injuries" should be the beginning and the end of the inquiry. To determine whether the injury complained of is personal, we must look to the origin and character of the claim, and not to the consequences that result from the inquiry.

Id. at 1299 (citations omitted) (emphasis added).

Admitting that the question of interpretation presented by the language of Sec. 104(a)(2) presents "conceptual challenges" and that focusing on the nature of the taxpayer's injury rather than the consequences flowing from it will be difficult, the Tax Court explained however that:

this [approach] is no more difficult in most cases than the type of inquiry previously required by the line of cases, culminating in [the Tax Court decision in] Roemer, which distinguished the nature of the consequences resulting from a claim. Furthermore, the approach that we will now apply in all cases, whether the injury claimed is personal, more accurately reflects the inquiry required by the plain meaning of the statute. Exclusion under section 104 will be appropriate if compensatory damages are received on account of any invasion of the rights that an individual is granted by virtue of being a person in the sight of the law.

Threlkeld, 87 T.C. 1308 (footnote omitted).5

In Bent v. Commissioner, 835 F.2d 67 (3d Cir.1987), this Court also adopted the unified approach of the Ninth Circuit, and applied it to an action brought under 42 U.S.C. Sec. 1983 (1982). In Bent, a teacher claimed he had been denied re-employment for reasons which abridged his first amendment rights. Id. at 69. The school settled and the teacher received a sum based on his lost wages. Id. at 70. This Court rejected the Commissioner's argument that since there was no pain and suffering shown in the case, merely an economic loss resulting from the discharge, the suit was in reality one for lost wages not personal injuries. Id. Focusing instead on the nature of the claim, we explained that a denial of a civil right such as free speech involves a personal injury just as much as a physical assault, and, citing Roemer, held that as a result the whole of the taxpayer's damages were excludable under Sec. 104(a)(2) because "any economic injury proximately resulting, such as loss of wages ... may be compensated for in an award of damages for the personal injuries involved...." Id. at 71.6 See also Wulf v. City of Wichita, 883 F.2d 842, 872-73 (10th Cir.1989) (holding that an award of damages specifically allocated to back pay as a result of a wrongful discharge in violation of first amendment rights under Sec. 1983 was nontaxable under Sec. 104(a)(2)).

Recently, this Court extended the analysis of Roemer and Bent both to a retaliatory discharge claim under the Fair Labor Standards Act ("FLSA") and a wrongful discharge claim under state law. Byrne v. Commissioner, 883 F.2d 211 (3d Cir.1989). The taxpayer in Byrne claimed that she was treated discriminatorily by her employer because she had cooperated with an EEOC investigation of wage disparity at her workplace. Id. at 212. Following Roemer and Bent, we held that because a claim under the FLSA's antidiscrimination provision7, as well as a claim under New Jersey's wrongful discharge laws, was the assertion of a personal injury, tort or tort type right, rather than an economic right arising out of a contract, the taxpayer's entire settlement award was excludable from gross income. Therefore, we rejected

the Commissioner's argument ... that the settlement is taxable because it was intended, at least in part, to compensate [the taxpayer] for lost wages due to her wrongful firing. The relevant inquiry, as the Tax Court noted, is whether the settlement was received on account of personal or non-personal injuries, not whether the damages compensate the taxpayer for economic losses. To the extent that the Commissioner argues that because the settlement was intended to compensate [the taxpayer] for economic losses it is therefore compensating her for non-personal injuries, we find this argument to have been explicitly rejected in Bent, and we reject it again here.

Id. at 214.

We are asked now to extend Byrne to a different type of discrimination claim, i.e. age discrimination. The Tax Court in the instant case concluded that half of the taxpayer's settlement was taxable income and that half was excludable under Sec. 104(a)(2). In its opinion, the Tax Court found that the taxpayer's ADEA suit consisted of claims for both wage-related damages and liquidated damages. Rickel v. Commissioner, 92 T.C. 510, 522 (1989). Noting that the amount of liquidated damages recoverable in an ADEA suit must be based upon the amount of back pay awarded, the Court allocated half of the settlement to each type of damage claim. Id. The Court then held that "damages in lieu of wages are in the nature of a breach of contract action," id. at 521, while "liquidated damages are intended as compensation for a tort or tort-like injury," id. Therefore, only the latter damages were excludable from gross income under section 104(a)(2).8

The taxpayer argues that the Tax Court erred in finding that the taxpayer's ADEA action consisted of one-half personal injury, tort type claims and one-half nonpersonal injury, contract type claims. He argues that under our decision in Byrne the entire settlement amount should be excludable as compensation for a personal injury. We agree and find that the Tax Court failed to properly apply the analysis adopted by this Court--and, indeed, the analysis the full Tax Court itself has adopted in Threlkeld--to determine whether settlement proceeds are excludable from gross income under Sec. 104(a)(2).

We note that the Tax Court correctly stated the approach to be applied, under Threlkeld, to resolve a Sec. 104(a)(2) problem: "[t]o determine whether the damages received were paid on account of personal injuries ... we must look to the nature of the claim and not to the consequences that result from the injury." Id. at 516. The Tax Court at one point even characterized correctly the nature of the taxpayer's age discrimination claim as the assertion of a personal injury, tort type right. Id. at 522.

However, the Tax Court then slipped into the old analysis previously abandoned by the full Tax Court in Threlkeld, i.e., "mount[ing] an inquiry to determine whether the components of the [taxpayer's discrimination] injuries for which the [settlement was] made are personal or [economic]." Threlkeld, 87 T.C. 1300. Instead, once it found that age discrimination was analogous to a personal injury and that the taxpayer's ADEA action amounted to the assertion of a tort type right, the Tax Court should have ended its analysis and found that all damages flowing therefrom were excludable under Sec. 104(a)(2). See id. at 1299 (the determination of whether the damages were paid on account of a personal injury is "the beginning and the end of the inquiry"). By going further and rummaging through the taxpayer's prayers for relief in order to determine the nature of his claim, the Tax Court was simply defining the nature of the taxpayer's injury by reference to its nonpersonal consequences, an approach we explicitly rejected in both Bent and Byrne, and the full Tax Court rejected in Threlkeld. As in Byrne, the nonpersonal, economic effects of the employer's act of discrimination, e.g., loss of wages, does not transform a personal tort type claim into one for nonpersonal injuries. Byrne, 883 F.2d at 214.9 See also Roemer, 716 F.2d at 699.

Furthermore, we are confident that the Tax court correctly characterized age discrimination as more analogous to a personal injury tort than a breach of contract claim. We characterized the taxpayer's action in Byrne, under the FLSA's antidiscrimination provision, as asserting a personal injury, tort type right because:

such a suit alleges the violation of a duty owed the plaintiff by the defendant employer which arises by operation of the Act. This duty is independent of any duty an employer might owe his employee pursuant to an express or implied employment contract; it arises by operation of law. Thus, the statutory claim seeks to remedy a statutory violation that the law has defined as wrongful.

Byrne, 883 F.2d at 215.10 We believe that a similar analysis applies to a claim of age discrimination under the ADEA.

Like the antidiscrimination provision of the FLSA, the duty of an employer to refrain from discriminating against employees on the basis of their age arises by operation of a statute. Society has made the moral and economic determination that as a matter of law it will not abide such discrimination. Such a duty arises even in the absence of a written employment contract and despite the existence of either contrary terms in such a contract or conflicting common law employment-at-will principles.11

Moreover, we do not believe that the ADEA, and federal employment discrimination statutes in general, are usefully viewed as a Congressional attempt to rewrite the terms of employment contracts. For one thing, nothing in the statutes suggests or hints at such an intention. Cf. 42 U.S.C. Sec. 2000e-2 (1982) (speaking in terms of "unlawful employment practices for an employer"). But more importantly the scope of these statutes goes beyond the mere employer-employee context, protecting individuals from various forms of discrimination even if they are not yet in a contractual relationship, e.g., refusal to hire contexts. See, e.g., 29 U.S.C. Sec. 623(a) (1982); 42 U.S.C. Sec. 2000e-2(a) (1982).12

We are strengthened in our conclusion by courts in other jurisdictions that have characterized an action to redress discrimination in the workplace as a tort claim for personal injuries whether the discrimination was based on race, see Goodman v. Lukens Steel Co., 482 U.S. 656, 107 S. Ct. 2617, 2621, 96 L. Ed. 2d 572 (1987) (describing Sec. 1981 of the Civil Rights laws as "part of a federal law barring racial discrimination, which, as the Court of Appeals [for the Third Circuit] said, is a fundamental injury to the individual rights of a person"); Patterson v. American Tobacco Co., 535 F.2d 257, 269 n. 10 (4th Cir.), cert. denied, 429 U.S. 920, 97 S. Ct. 314, 315, 50 L. Ed. 2d 286 (1976), sex, see Thompson v. Commissioner, 866 F.2d 709, 712 (4th Cir.1989); E.E.O.C. v. Vucitech, 842 F.2d 936, 944 (7th Cir.1988); Metzger v. Commissioner, 88 T.C. 834, 851-52 (1987), aff'd without opinion, 845 F.2d 1013 (3d Cir.1988), or age, see Jay v. International Salt Co., 868 F.2d 179, 180 (5th Cir.1989). Cf. Wilson v. Garcia, 471 U.S. 261, 277, 105 S. Ct. 1938, 1947, 85 L. Ed. 2d 254 (1985) (analogizing a violation of the Civil Rights Acts of 1871 to a violation of the fourteenth amendment which "is an injury to the individual rights of the person"); Dillon v. AFBIC Development Corp., 597 F.2d 556, 562 (5th Cir.1979) ("An action based upon the federal antidiscrimination statutes is essentially an action in tort") (suit brought under the Fair Housing Act and the Civil Rights Act of 1866); Tillman v. Wheaton-Haven Recreation Ass'n, Inc., 517 F.2d 1141, 1143 (4th Cir.1975) ("an action brought under statutes forbidding racial discrimination is fundamentally for the redress of a tort") (suit brought under various sections of the Civil Rights Acts of 1866 and 1964). Indeed, in dictum, the Supreme Court has analogized an action to redress discrimination, at least in the context of race, to defamation or intentional infliction of emotional distress claims. Curtis v. Loether, 415 U.S. 189, 195 n. 10, 94 S. Ct. 1005, 1009 n. 10, 39 L. Ed. 2d 260 (1974) (explaining that the "contours of the [intentional infliction] tort are still developing, and it has been suggested that 'under the logic of the common law development of a law of insult and indignity, racial discrimination might be treated as a dignitary tort.' C. Gregory & H. Kalven, Cases and Materials on Torts 961 (2d ed. 1969)").13

Thus, focusing on the nature of the claim, we are convinced that the taxpayer's discrimination suit under the ADEA was analogous to the assertion of a tort type right to redress a personal injury. By discriminating against the taxpayer on the basis of his age, Malsbary invaded the rights that the taxpayer "is granted by virtue of being a person in the sight of the law." Threlkeld, 87 T.C. 1308. The taxpayer merely sought the remedies afforded by the statute as compensation for the personal injury he suffered as a result of his employer's act of discrimination; the requested remedies were not separate claims in themselves to redress the employer's breach of a contract.14 The nonpersonal consequences of the discrimination, e.g., the loss of wages, does not transform discrimination into a nonpersonal injury. Therefore, despite the contrary tax liability assumptions that some courts, including this one, have made in reviewing judgments obtained for ADEA violations, see, e.g., Gelof v. Papineau, 829 F.2d 452, 455-56 (3d Cir.1987); Blim v. Western Elec. Co., 731 F.2d 1473, 1480 (10th Cir.), cert. denied, 469 U.S. 874, 105 S. Ct. 233, 83 L. Ed. 2d 161 (1984)15, we hold that just as in the case of a physical personal injury, all the damages received by the taxpayer on account of age discrimination are excludable under Sec. 104(a)(2).

We find some additional support for this view in the legislative history of Congress' recent amendment to Sec. 104(a)(2) in the 1989 Omnibus Budget Reconciliation Act, 103 Stat. 2379 (1989), which added the provision that: "Paragraph (2) shall not apply to any punitive damages in connection with a case not including physical injury or physical sickness." This action is significant to our analysis because the original bill introduced in the House of Representatives would have limited the Sec. 104(a)(2) exclusion to cases involving physical injury or physical sickness. As the House Ways and Means Committee explained the bill, "some courts have held that the exclusion applies to damages in cases involving employment discrimination," but that the "committee believes that such treatment is inappropriate where no physical injury or sickness is involved." H.R.Rep. No. 247, 101st Cong., 1st Sess. 1354-55, reprinted in, 1990 U.S.Code Cong. & Admin.News 2824-25. The Senate bill contained no such amendment to Sec. 104(a)(2). In its final conference bill, Congress chose to implicitly endorse the courts' expansive interpretation of Sec. 104(a)(2) to encompass nonphysical injuries and merely circumscribe the scope of the exemption as to only one type of remedy, i.e., punitive damages, and not other types of remedies typically available in employment discrimination cases, such as back pay. H.R.Conf.Rep. No. 386, 101st Cong., 1st Sess. 622-23, reprinted in, 1990 U.S.Code Cong. & Admin.News 3225-26. Cf. Lorillard v. Pons, 434 U.S. 575, 580, 98 S. Ct. 866, 870, 55 L. Ed. 2d 40 (1978) ("Congress is presumed to be aware of an administrative or judicial interpretation of a statute and to adopt that interpretation when it re-enacts a statute without change.") (citing cases).

Of course, it might be troubling to some that a successful plaintiff in an ADEA suit will make out better, vis-a-vis federal income tax liability, than if the plaintiff had not been discriminated against in the first place. Although this concern is understandable, we note that we are simply following the Treasury regulation that injects into the analysis tort and contract concepts. Moreover, the successful ADEA plaintiff is being treated no better (or worse now) than the typical tort victim who suffers a physical injury. See supra p. 658. We see no reason to treat one personal injury victim any differently than another. See Miller v. Commissioner, 93 T.C. 330, 337 (1989) (full Tax Court in a 9-1 decision) ("Section 104 does not distinguish between physical and nonphysical injuries, and we see no sound reason to construe the statute in such a way as to not afford the same tax treatment to recoveries for all types of 'personal' injury regardless of consequence.") (citation omitted).16III.

The taxpayer in this case also argues that should we reverse the Tax Court and hold that the entire settlement is excludable from gross income under Sec. 104(a)(2), we should also reconsider the Tax Court's decision not to award the taxpayer reasonable litigation expenses under the Internal Revenue Code of 1986, 26 U.S.C. Sec. 7430. Since we have reversed the Tax Court we have also considered this additional issue. However, we do not believe the taxpayer is entitled to expenses under the IRC.

In order to recover reasonable litigation expenses under Sec. 7430, the taxpayer must establish that he was the "prevailing party." 26 U.S.C. Sec. 7430(a). The statutory definition of "prevailing party" is a party who both (1) "establishes that the position of the United States in the civil proceeding was not substantially justified," 26 U.S.C. Sec. 7430(c)(2)(A)(i)17, and (2) "has substantially prevailed with respect to the amount in controversy" or "has substantially prevailed with respect to the most significant issue or set of issues presented," 26 U.S.C. Sec. 7430(c)(2)(A)(ii)(I), (II). We do not believe that the taxpayer has established requirement (1).

The Commissioner's principal position throughout these proceedings has been that one-half of the settlement figure was for back pay and one-half was for liquidated damages, and that both types of damages were taxable. The Commissioner argued that back pay was taxable income because it was paid on account of a nonpersonal injury. Although we have rejected that argument here, given that the Commissioner prevailed in the Tax Court on the issue, that Byrne had not yet been decided by this Court, the inconsistency we have found in the Tax Court's approach to this issue, see supra n. 5, and the assumption by many courts that such back pay awards are taxable, see supra note 15 and accompanying text, we think that the Commissioner's position could be deemed as reasonably supported in the case law. See, e.g., Smith v. United States, 850 F.2d 242, 246 (5th Cir.1988) (requiring taxpayer to prove that the government's position was unjustified); Boatmen's First Nat'l Bank of Kansas City v. United States, 723 F. Supp. 163, 170 (W.D.Mo.1989); Feldmar v. Commissioner, 56 T.C.M. (CCH) 1414, 1416 (1989) ("In determining whether [the government's] position was not substantially justified, the question is one of whether [the government's] position in the litigation was unreasonable."). Cf. Pierce v. Underwood, 487 U.S. 552, 108 S. Ct. 2541, 2550, 101 L. Ed. 2d 490 (1988) (interpreting the phrase "substantially justified" for purposes of the closely related Equal Access to Justice Act to mean justified to a degree that would satisfy a reasonable person). See generally Giesecke v. United States, 637 F. Supp. 309, 310-12 (W.D.Tex.1986) (no difference between "substantially justified" test under EAJA and "unreasonableness" standard under the IRC of 1954); Kaufman v. Egger, 584 F. Supp. 872, 877 n. 1 (D.Me.1984), aff'd, 758 F.2d 1 (1st Cir.1985) (same).

We believe that the Commissioner's position that the portion of the settlement it viewed as liquidated damages was taxable is more problematic. The Commissioner argued that under the ADEA liquidated damages are punitive and, as such, are taxable income under Sec. 61, citing Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 75 S. Ct. 473, 99 L. Ed. 483 (1955). Although the Tax Court ultimately rejected this argument,18 for purposes of Sec. 7430 the Court found the Commissioner's position was "substantially justified." App. at 508. See Phillips v. Commissioner, 851 F.2d 1492, 1499 (D.C.Cir.1988) (whether the government's position is substantially justified must be determined by all the facts and circumstances and simply because the government lost in the Tax Court should not be dispositive). We do not believe that the Court abused its discretion in so finding. See Zinniel v. Commissioner, 883 F.2d 1350, 1354-55 (7th Cir.1989); Berks v. United States, 825 F.2d 1262, 1263 (8th Cir.1987). Cf. Underwood, 108 S. Ct. at 2546-49 (deciding that the abuse of discretion standard of review should be applied to the district court's determination of substantially justified under EAJA).

Unlike the FLSA, liquidated damages are not generally available to plaintiffs under the ADEA. To recover such, the plaintiff must establish that the employer willfully violated the Act. 29 U.S.C. Sec. 626(b) (1982). In discussing the statute's willfulness standard, the Supreme Court has noted that the "legislative history of the ADEA indicates that Congress intended for liquidated damages to be punitive in nature." Trans World Airlines, Inc. v. Thurston, 469 U.S. 111, 125, 105 S. Ct. 613, 83 L. Ed. 2d 523 (1985). Since the plaintiff's recovery of liquidated damages is not based on the extent of the taxpayer's injury but instead the employer's degree of culpability, the Court's interpretation of the legislative history seems to comport with the statute's structure. Furthermore, at least one court has characterized liquidated damages under the ADEA as punitive. Kelly v. American Standard, Inc., 640 F.2d 974, 979 (9th Cir.1981). Cf. Dreyer v. ARCO Chem. Co., 801 F.2d 651, 657-58 (3d Cir.1986), cert. denied, 480 U.S. 906, 107 S. Ct. 1348, 94 L. Ed. 2d 519 (1987) (looking to general punitive damage principles to determine the meaning of "willfulness" in the context of disparate treatment in a discrete employment situation).

Moreover, it was not unreasonable for the Commissioner to have interpreted Glenshaw Glass as standing for the proposition that all punitive damage awards are includable in gross income. Although the court in Glenshaw Glass was apparently considering only whether treble damages under the antitrust laws were taxable under the IRC, its language was much broader: "Damages for personal injury are by definition compensatory only. Punitive damages, on the other hand, cannot be considered a restoration of capital for taxation purposes." Glenshaw Glass, 348 U.S. at 432 n. 8, 75 S. Ct. at 477 n. 8. Both courts and commentators have generally interpreted Glenshaw Glass as having enunciated the broader proposition. See, e.g., Thomson v. Commissioner, 406 F.2d 1006, 1008 (9th Cir.1969); Frolik, supra p. 658, at 17-18.19

Thus, we hold that the Commissioner's position that back pay and liquidated damages under the ADEA represent taxable income was substantially justified. Therefore, we will affirm the Tax Court's decision to deny the taxpayer's application for reasonable litigation expenses.

To summarize, we disagree with the Tax Court that half of the taxpayer's settlement is taxable income. Because age discrimination is analogous to a personal injury tort, all damages caused by that injury are excludable under Sec. 104(a)(2). However we do agree with the Tax Court that the taxpayer is not entitled to reasonable litigation expenses since the Commissioner's position that the entire settlement amount represented taxable income was substantially justified. Costs taxed against the appellee.