New decision setback for whistleblowers and civil rights victims.
Washing, D.C. - July 3, 2007. The U.S. Court of Appeals for the
District of Columbia Circuit reversed itself on a key civil rights tax
case and held that the IRS can tax damage awards based solely on
compensating victims who suffer emotional injuries. On August 22, 2006
the same court held that such taxes were unconstitutional, as
compensation for a documented "loss" was not "income" subject to the
In a major reversal, the Court held that compensation for personal injuries are taxable.
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.
I an August 22, 2006 decision, the U.S. Court of Appeals for the D.C.
Circuit agreed with Ms. Murphy, and found that compensation limited to
making a human being whole for actual documented losses to physical or
mental health were not subject to an income tax. The IRS forcibly
appealed that decision and the Appeals Court agreed to vacate its
original decision and hear reargument on the case.
On rehearing the IRS urged the Court to treat damages to people
differently from damages to property. The IRS contended that
compensation awarded to a person for the loss of an arm or a leg was
not payment to make a person "whole," but was payment obtained as part
of a "forced sale." In other words, if a person suffered a mental
breakdown after witnessing her/his child being murdered, payment for
that mental breakdown was taxable - as the victim (according to the
IRS) simply was "forced" to sell his or her mental health, and obtained
"income" based on the forced sale theory.
In a remarkable reversal of its prior decision, the Court adopted this baseless argument. The Court held as follows:
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, p. 2.
"The Court's reversal stands reality on its head," said David K.
Colapinto, who argued on behalf of Ms. Murphy. "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
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. it permits Congress to
enact retaliatory taxes, stripping people from the Constitutional
protections afforded property. Damages to whistleblowers are not part
of a business transaction - forced or otherwise. They are part of harm
caused by illegal conduct. This decision threatens fundamental human
Murphy v. IRS Decision, July 3, 2007
D.C. Circuit Reverses Course In Murphy Redux
By Jeremiah Coder,TAX NOTES, July 9, 2007
Murphy v. IRS Page