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 income.

National Whistleblowers Center General Counsel David K Colapinto, who represents Ms. Murphy, released the following statements regarding the Court's decision:

"The DC Circuit's decision was contradictory and wrong. It will have a tragic impact on thousands of whistleblowers and victims of discrimination. We are not surprised though, that the Supreme Court declined to hear the case, as there was not a traditional "split in the circuits," as the DC Circuit was the first court to take this issue on. Given the DC Circuit's difficulty in dealing with this issue, I expect that it will be taken up in other courts across the country."

"It is unfair and unconstitutional to tax victims of discrimination and retaliation when the awards were simply compensation to make them whole again. The money is to restore a loss for personal injury; it is not income."

Unfortunately, as a result of the Court's decision not to hear the Murphy case, whistleblowers and other civil rights victims whose make whole compensatory damages awards are taxed will have to continue to fight the IRS through the courts. The only alternative to continued litigation is for Congress to change the tax code.
Currently pending before Congress is the Civil Rights Tax Relief Act of 2007 ("CRTRA"), H.R. 1540, which would end unfair taxation of noneconomic damages received by those who have suffered unlawful discrimination in the workplace or other violations of their employment rights.

The CRTRA was introduced in the House by Representative John Lewis (D-GA), who was joined by a bipartisan group of original CRTRA cosponsors, including Representatives Deborah Pryce (R-OH), Sander Levin (D-MI), Jim Ramstad (R-MN), Xavier Becerra (D-CA), and Phil English (R-PA). The Senate companion bill was introduced by Senators Jeff Bingaman (D-NM) and Susan Collins (R-ME).

The CRTRA has broad bi-partisan support. It is supported by employer and employee advocacy groups alike because both business and employee organizations recognize that taxing non-economic make whole compensatory damages makes settlement more difficult and results in protracted litigation in employment disputes.

For more information:

• Petitioner's Reply Brief, 3-27-08
• Solicitor General's Brief, 3-17-08
• Murphy v. IRS