December 13, 2007, Washington, D.C. – Today, The U.S. Supreme Court was asked to hear a key civil rights tax appeal which could affect thousands of past and future victims of civil rights offenses and whistleblower retaliation. In Murphy v. IRS, the U.S. Court of Appeals for the District of Columbia Circuit reversed its own original ruling in deciding that court awards for damages such as emotional distress and loss of reputation are taxable as income.
The case was brought by Marrita Murphy, an environmental whistleblower
who won her case before Department of Labor, and was awarded
compensatory damages to vindicate her rights under six federal
environmental whistleblower statutes. Murphy filed suit when the IRS
demanded that she pay taxes on the “make-whole” award as if it were
income. After having her case dismissed, Murphy filed an appeal.
After full briefing and oral argument, the Appeals court initially held
that Murphy’s award was not income and the tax on her damages violated
the U.S. Constitution. Then, under pressure from the Bush
Administration, the judges decided to rehear the case. In this ruling,
Murphy II, the D.C. Circuit reversed its own previous decision,
declaring that non-physical compensatory damages are taxable as gross
For the first time the issue of whether compensatory damages for
non-physical injuries are taxable income is squarely before the Supreme
Court. This is a major issue impacting all cases in which any person
obtains compensatory damages for a mental distress or illness, or for
physical problems resulting from or associated with emotional distress.
David K. Colapinto, General Counsel for the National Whistleblowers
Center and attorney for Marrita Murphy said he is requesting that the
Supreme Court review the issue because "The D.C. Circuit’s reversal
stands reality on its head."
Colapinto went on to say that, "The D.C. Circuit’s decision in the
Murphy case is the first time that any court has construed the tax code
to imply an 'excise' tax on the 'privilege' of utilizing the 'legal
system' to vindicate a federal statutory right."
“However, Congress did not pass a special tax demanding payment from
people who use the legal system to prevent retaliation against
whistleblowers or to vindicate civil rights. It was error for the D.C.
Circuit to imply such a tax," he added.