Washington, D.C.-March 22, 2007. The U.S. Court of Appeals for the District of Columbia Circuit has scheduled argument in the Murphy v. IRS tax case for April 23, 2007 at the U.S. Courthouse in Washington, D.C. The case will determine whether “make whole” compensatory damages paid to whistleblowers (and other employees) as compensation for a “loss” constitutes taxable income.
The case concerns Marrita Murphy, who was illegally blacklisted in
retaliation for raising concerns about environmental violations
committed by the New York Air National Guard. After a contested trial
on the merits, the U.S. Department of Labor found that the NY Air Guard
violated six federal environmental whistleblower laws when it
blacklisted Ms. Murphy. She was awarded compensatory damages for
significant losses to her reputation and health and the NY Air Guard
was ordered to “make her whole.” The IRS demanded that Ms. Murphy pay
a tax on these “make whole” damages and Ms. Murphy filed a tax refund
action in federal court.
On August 22, 2006 the D.C. Circuit Court of Appeals agreed with Ms.
Murphy and ruled that compensation limited to making a damaged employee
“whole” was not “income” under the 16th Amendment of the U. S.
Constitution. That Amendment has long been interpreted as excluding
taxes on “make whole” type remedies, such as fire and life insurance
and workers compensation claims.
At the request of the IRS, the Court agreed to re-hear arguments on
the case before the same panel of judges who earlier ruled in favor of
In a statement issued by the National Whistleblowers Center’s General
Counsel, and an attorney for Ms. Murphy, David K. Colapinto stated:
The IRS’s position punishes whistleblowers and other civil rights
victims. In a radical break from past precedent, the IRS is demanding
that Ms. Murphy pay a tax on compensation designed to make her whole
for physical and emotional injuries. If the IRS’ position is
sustained, whistleblowers will be obligated to pay a tax on damages
related to pain and suffering. Such a tax undermines the whistleblower
and civil rights laws, and would set a dangerous precedent permitting
the IRS to tax all forms of make whole remedies, including life and
property insurance payments.