Washington D.C. – August 17, 2007. The full U.S. Court of Appeals for the District of Columbia Circuit has been asked to reconsider last month’s decision by a three-judge panel that reversed itself on a key civil rights tax case. On July 3, 2007, the panel held that the IRS can tax damage awards based solely on compensating victims who suffer personal injuries. However, on August 22, 2006, the same panel in the same case held that such taxes were unconstitutional, as compensation for a documented "loss" was not "income" subject to the tax code.
In a major reversal, the three-judge panel, (Chief Judge Douglas H.
Ginsburg, and Judges Judith W. Rogers and Janice Rogers Brown), held
that make whole compensation to restore personal injuries losses are
The case arose as a result of the Department of Labor ruling in the
whistleblower case of Marrita Murphy. In that case, the Labor
Department held that Ms. Murphy suffered substantial damages to her
health and reputation, and awarded her $70,000 in compensatory damages
strictly related to her losses.
The IRS taxed Ms. Murphy's damages and she asked for a refund of the tax on the grounds that her damages were not income.
In an August 22, 2006 decision, Judge Ginsburg, writing for the 3-judge
panel, agreed with Ms. Murphy, and found that compensation for actual
documented personal injury losses were not subject to an income tax.
The IRS forcibly argued that decision was wrong and the panel agreed to
vacate its original decision and rehear the case to consider issues
that were never timely raised on appeal by the IRS.
Rather than overrule its prior decision (Murphy v. IRS, Aug. 22, 2006)
holding that taxing Murphy’s damages was unconstitutional, the panel
simply held that Congress intended to amend the tax code “by
implication” to tax personal injury damages under its authority to
create an excise tax on people who use the courts to vindicate their
rights. No court in the history of the United States has ever upheld
such an implied tax.
In a remarkable ruling, the Court held that compensation for damages
for emotional distress suffered by a whistleblower were not paid to
make the employee “whole,” but were instead paid as part of a “forced
sale” which Congress could tax under its excise tax authority. The
Murphy's situation seems akin to an involuntary conversion of assets;
she was forced to surrender some part of her mental health and
reputation in return for monetary damages.
Murphy v. IRS (July 3, 2007)
Attorneys for Marrita Murphy have asked the full U.S. Court of Appeals
for the D.C. Circuit to reconsider the panel’s holding because it
conflicts with Supreme Court and other legal precedent, and it raises
questions of exceptional importance.
"The Court's reversal stands reality on its head," said David K.
Colapinto, who argued on behalf of Ms. Murphy. “This case marks the
first time that a court has interpreted the gross ‘income’ statute, 26
U.S.C. § 61(a), to be amended ‘by implication’ to create a tax not
expressly enacted by Congress. Additionally, this 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,” Colapinto added.
"When whistleblowers suffer retaliation, they do not 'sell' their
mental health. If people are injured in a car accident, they do not
'sell' their arms and legs. These are real human losses, and
compensation to restore that human loss was never intended to be
'income' under our Constitution or the tax code," Colapinto said.
Stephen M. Kohn, the President of the National Whistleblowers Center
and co-counsel for Ms. Murphy, stated: "This decision is a terrible
setback for all victims of civil rights abuses. Congress did not pass a
special tax demanding payment from people who use the legal system to
prevent retaliation against whistleblowers. It was error for the Court
to imply such a tax. This decision threatens fundamental human rights,
including access to the courts."
Petition for Rehearing En Banc
August 17, 2007
Murphy Asks D.C. Circuit for En Banc Review
by Jeremiah Coder, Oct. 21, 2007