Appeals Court Hears New Arguments in Murphy Tax Case

Published on March 22, 2007

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Appeals Court Hears New Arguments in Murphy Tax Case

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 Ms. Murphy.

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.

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