Murphy v. IRS
Encyclopedia
Marrita Murphy and Daniel J. Leveille, Appellants v. Internal Revenue Service and United States of America, Appellees (commonly known as Murphy v. IRS), is a controversial tax case in which the United States Court of Appeals for the District of Columbia Circuit
originally held that the taxation of emotional distress
awards by the federal government is unconstitutional. That decision was vacated, or rendered void, by the Court on December 22, 2006. The Court eventually overturned its original decision, finding against Murphy in an opinion issued on July 3, 2007.
The July 3, 2007 decision was that the taxpayer's recovery could be taxed under Article I, Section 8 of the Constitution even if the recovery were not "income" under the Sixteenth Amendment
. The Court conceded that this rationale for granting a rehearing and overturning the original decision was not in the government's original appeal, and would not normally have been considered under the Court's rules. The Court indicated that the issue was of such importance, affecting "the broad public interest", that the new argument could be entertained.
and joined by Judges Judith Rogers
and Janice Rogers Brown
, on August 22, 2006. The opinion had struck down to the extent that the statute purported to categorize compensatory damages for emotional distress and loss of reputation as being includible in gross income for Federal income tax purposes.
Marrita Murphy was represented by David K. Colapinto
of the law firm Kohn, Kohn & Colapinto
, who also handled her appeal before the D.C. Circuit. Murphy had sued to recover income taxes that she paid on the compensatory damages for emotional distress and loss of reputation that she was awarded in an action against her former employer under whistle-blower statutes for reporting environmental hazards on her former employer’s property to state authorities. Murphy had claimed both physical and emotional-distress damages as a result of her former employer’s retaliation and mistreatment.
In a prior administrative proceeding, Murphy had been awarded compensatory damages of $70,000, of which $45,000 was for “emotional distress or mental anguish” and $ 25,000 was for “injury to professional reputation.” Murphy reported the $70,000 award as part of her “gross income” and paid $20,665 in Federal income taxes based upon the award.
Section 104(a)(2) of the Internal Revenue Code
excludes, from gross income, amounts "received . . . on account of personal physical injuries." The statute provides that for purposes of that exclusion, "emotional distress shall not be treated as a physical injury or physical sickness." Based on that provision, Murphy sought a refund of the full amount of tax, arguing that the award should be exempt from taxation both because the award was “in fact” to compensate for “physical personal injuries” and because the award was not “income” within the meaning of the Sixteenth Amendment.
Interpreting Section 104(a)(2), the D.C. Circuit first held in August 2006 that the damages at issue did not fall within the scope of the statute because the damages were not in fact to compensate for “personal physical injuries,” and thus could not be excluded from gross income under that provision.
The D.C. Circuit next analyzed whether Section 104(a)(2) is “constitutional,” relying upon language from Commissioner v. Glenshaw Glass Co.
to the effect that, under the Sixteenth Amendment, Congress may “tax all gains” or “accessions to wealth.” Murphy argued that her award was neither a gain nor an accession to wealth because it compensated her for nonphysical injuries, and was thus effectively a restoration of “human capital.”
Recognizing that the Supreme Court has long held that a restoration of capital “[i]s not income,” and thus is not taxable, and that personal injury recoveries have traditionally been considered “nontaxable on the theory that they roughly correspond to a return of capital,” the D.C. Circuit accepted Murphy’s argument in its August 2006 decision. The D.C. Circuit reasoned that Murphy’s award for emotional distress or loss of reputation is not taxable because her damages “were awarded to make Murphy emotionally and reputationally ‘whole’ and not to compensate her for lost wages or taxable earnings of any kind.” The D.C. Circuit also explained that a 1918 opinion of the Attorney General stating that proceeds from an accident insurance policy were not taxable income and a 1922 IRS ruling that damages based on loss of reputation were not taxable income, both issued relatively near the Sixteenth Amendment’s ratification in 1913, support its ruling. The D.C. Circuit thus concluded that “the framers of the Sixteenth Amendment would not have understood compensation for a personal injury – including a nonphysical injury – to be income.” Murphy’s position was that her award constituted only monies that “made her whole” and, in effect, was a return of her “human capital.”
(i.e., a hearing before all the members of the Court, rather than before only the panel of three judges who made the original decision).
The original three judges then agreed to rehear the case themselves. The original August 2006 judgment, which had been mandatory precedent
only in the District of Columbia, was vacated.
On July 3, 2007, the Court ruled (1) that the taxpayer's compensation was received on account of a non-physical injury or sickness; (2) that gross income under section 61 of the Internal Revenue Code does include compensatory damages for non-physical injuries, even if the award is not an "accession to wealth," (3) that the income tax imposed on an award for non-physical injuries is an indirect tax, regardless of whether the recovery is restoration of "human capital," and therefore the tax does not violate the constitutional requirement of Article I, section 9, that capitations or other direct taxes must be laid among the states only in proportion to the population; (4) that the income tax imposed on an award for non-physical injuries does not violate the constitutional requirement of Article I, section 8, that all duties, imposts and excises be uniform throughout the United States; (5) that under the doctrine of sovereign immunity, the Internal Revenue Service may not be sued in its own name. The Court stated: "[a]lthough the 'Congress cannot make a thing income which is not so in fact,' [ . . . ] it can label a thing income and tax it, so long as it acts within its constitutional authority, which includes not only the Sixteenth Amendment but also Article I, Sections 8 and 9." The court ruled that Ms. Murphy was not entitled to the tax refund she claimed, and that the personal injury award she received was "within the reach of the congressional power to tax under Article I, Section 8 of the Constitution" -- even if the award was "not income within the meaning of the Sixteenth Amendment".
of Kohn, Kohn & Colapinto
, requested a rehearing of the July 2007 decision by the full Court of Appeals (en banc) for the District of Columbia Circuit, which was denied on September 14, 2007. On December 17, 2007, Murphy filed a petition with the U.S. Supreme Court asking for a review of the decision of the Court of Appeals. The Supreme Court denied review of the decision on April 21, 2008.
United States Court of Appeals for the District of Columbia Circuit
The United States Court of Appeals for the District of Columbia Circuit known informally as the D.C. Circuit, is the federal appellate court for the U.S. District Court for the District of Columbia. Appeals from the D.C. Circuit, as with all the U.S. Courts of Appeals, are heard on a...
originally held that the taxation of emotional distress
Emotional distress
Mental distress or anxiety suffered as a response to a sudden, severe, and saddening experience.Emotional distress may refer to:* Law of torts:** Intentional infliction of emotional distress** Negligent infliction of emotional distress* Medicine:...
awards by the federal government is unconstitutional. That decision was vacated, or rendered void, by the Court on December 22, 2006. The Court eventually overturned its original decision, finding against Murphy in an opinion issued on July 3, 2007.
The July 3, 2007 decision was that the taxpayer's recovery could be taxed under Article I, Section 8 of the Constitution even if the recovery were not "income" under the Sixteenth Amendment
Sixteenth Amendment to the United States Constitution
The Sixteenth Amendment to the United States Constitution allows the Congress to levy an income tax without apportioning it among the states or basing it on Census results...
. The Court conceded that this rationale for granting a rehearing and overturning the original decision was not in the government's original appeal, and would not normally have been considered under the Court's rules. The Court indicated that the issue was of such importance, affecting "the broad public interest", that the new argument could be entertained.
The original decision
The Court had issued its original opinion, written by Chief Judge Douglas H. GinsburgDouglas H. Ginsburg
Douglas Howard Ginsburg is a judge on the United States Court of Appeals for the District of Columbia Circuit. He was appointed to this court in October 1986 by President Ronald Reagan. He served as its Chief Judge from July 16, 2001 until February 10, 2008...
and joined by Judges Judith Rogers
Judith Ann Wilson Rogers
Judith Ann Wilson Rogers is a judge on the United States Court of Appeals for the District of Columbia Circuit. She was nominated by President Bill Clinton to replace current Associate Justice Clarence Thomas. She joined the circuit in 1994.She received an A.B. from Radcliffe College in 1961,...
and Janice Rogers Brown
Janice Rogers Brown
Janice Rogers Brown is a federal judge on the United States Court of Appeals for the District of Columbia Circuit. She previously was an Associate Justice of the California Supreme Court, holding that post from May 2, 1996 until her appointment to the D.C. Circuit.President George W. Bush...
, on August 22, 2006. The opinion had struck down to the extent that the statute purported to categorize compensatory damages for emotional distress and loss of reputation as being includible in gross income for Federal income tax purposes.
Marrita Murphy was represented by David K. Colapinto
David K. Colapinto
David K. Colapinto is an attorney for Kohn, Kohn & Colapinto, a Washington, D.C., USA, law firm specializing in employment law.Colapinto was born in Springfield, Massachusetts on December 4, 1958. He received his J.D. degree from Antioch School of Law after graduating from Boston University with a...
of the law firm Kohn, Kohn & Colapinto
Kohn, Kohn & Colapinto
Kohn, Kohn & Colapinto, a Washington, D.C. law firm specializing in employment law, represents whistleblowers in the United States. Washingtonian Magazine, in its December 2004 issue, named the firm the top whistleblower within the Beltway. The three partners are brothers Stephen M. Kohn, Michael...
, who also handled her appeal before the D.C. Circuit. Murphy had sued to recover income taxes that she paid on the compensatory damages for emotional distress and loss of reputation that she was awarded in an action against her former employer under whistle-blower statutes for reporting environmental hazards on her former employer’s property to state authorities. Murphy had claimed both physical and emotional-distress damages as a result of her former employer’s retaliation and mistreatment.
In a prior administrative proceeding, Murphy had been awarded compensatory damages of $70,000, of which $45,000 was for “emotional distress or mental anguish” and $ 25,000 was for “injury to professional reputation.” Murphy reported the $70,000 award as part of her “gross income” and paid $20,665 in Federal income taxes based upon the award.
Section 104(a)(2) of the Internal Revenue Code
Internal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
excludes, from gross income, amounts "received . . . on account of personal physical injuries." The statute provides that for purposes of that exclusion, "emotional distress shall not be treated as a physical injury or physical sickness." Based on that provision, Murphy sought a refund of the full amount of tax, arguing that the award should be exempt from taxation both because the award was “in fact” to compensate for “physical personal injuries” and because the award was not “income” within the meaning of the Sixteenth Amendment.
Interpreting Section 104(a)(2), the D.C. Circuit first held in August 2006 that the damages at issue did not fall within the scope of the statute because the damages were not in fact to compensate for “personal physical injuries,” and thus could not be excluded from gross income under that provision.
The D.C. Circuit next analyzed whether Section 104(a)(2) is “constitutional,” relying upon language from Commissioner v. Glenshaw Glass Co.
Commissioner v. Glenshaw Glass Co.
Commissioner v. Glenshaw Glass Co., , was an important income tax case before the United States Supreme Court. The Court held as follows:...
to the effect that, under the Sixteenth Amendment, Congress may “tax all gains” or “accessions to wealth.” Murphy argued that her award was neither a gain nor an accession to wealth because it compensated her for nonphysical injuries, and was thus effectively a restoration of “human capital.”
Recognizing that the Supreme Court has long held that a restoration of capital “[i]s not income,” and thus is not taxable, and that personal injury recoveries have traditionally been considered “nontaxable on the theory that they roughly correspond to a return of capital,” the D.C. Circuit accepted Murphy’s argument in its August 2006 decision. The D.C. Circuit reasoned that Murphy’s award for emotional distress or loss of reputation is not taxable because her damages “were awarded to make Murphy emotionally and reputationally ‘whole’ and not to compensate her for lost wages or taxable earnings of any kind.” The D.C. Circuit also explained that a 1918 opinion of the Attorney General stating that proceeds from an accident insurance policy were not taxable income and a 1922 IRS ruling that damages based on loss of reputation were not taxable income, both issued relatively near the Sixteenth Amendment’s ratification in 1913, support its ruling. The D.C. Circuit thus concluded that “the framers of the Sixteenth Amendment would not have understood compensation for a personal injury – including a nonphysical injury – to be income.” Murphy’s position was that her award constituted only monies that “made her whole” and, in effect, was a return of her “human capital.”
Judgment vacated
The Department of Justice asked for a rehearing en bancEn banc
En banc, in banc, in banco or in bank is a French term used to refer to the hearing of a legal case where all judges of a court will hear the case , rather than a panel of them. It is often used for unusually complex cases or cases considered to be of greater importance...
(i.e., a hearing before all the members of the Court, rather than before only the panel of three judges who made the original decision).
The original three judges then agreed to rehear the case themselves. The original August 2006 judgment, which had been mandatory precedent
Precedent
In common law legal systems, a precedent or authority is a principle or rule established in a legal case that a court or other judicial body may apply when deciding subsequent cases with similar issues or facts...
only in the District of Columbia, was vacated.
Rehearing and decision
The parties presented oral arguments in a rehearing on April 23, 2007,On July 3, 2007, the Court ruled (1) that the taxpayer's compensation was received on account of a non-physical injury or sickness; (2) that gross income under section 61 of the Internal Revenue Code does include compensatory damages for non-physical injuries, even if the award is not an "accession to wealth," (3) that the income tax imposed on an award for non-physical injuries is an indirect tax, regardless of whether the recovery is restoration of "human capital," and therefore the tax does not violate the constitutional requirement of Article I, section 9, that capitations or other direct taxes must be laid among the states only in proportion to the population; (4) that the income tax imposed on an award for non-physical injuries does not violate the constitutional requirement of Article I, section 8, that all duties, imposts and excises be uniform throughout the United States; (5) that under the doctrine of sovereign immunity, the Internal Revenue Service may not be sued in its own name. The Court stated: "[a]lthough the 'Congress cannot make a thing income which is not so in fact,' [ . . . ] it can label a thing income and tax it, so long as it acts within its constitutional authority, which includes not only the Sixteenth Amendment but also Article I, Sections 8 and 9." The court ruled that Ms. Murphy was not entitled to the tax refund she claimed, and that the personal injury award she received was "within the reach of the congressional power to tax under Article I, Section 8 of the Constitution" -- even if the award was "not income within the meaning of the Sixteenth Amendment".
Appeal of July 2007 decision
Murphy's attorneys, led by David K. ColapintoDavid K. Colapinto
David K. Colapinto is an attorney for Kohn, Kohn & Colapinto, a Washington, D.C., USA, law firm specializing in employment law.Colapinto was born in Springfield, Massachusetts on December 4, 1958. He received his J.D. degree from Antioch School of Law after graduating from Boston University with a...
of Kohn, Kohn & Colapinto
Kohn, Kohn & Colapinto
Kohn, Kohn & Colapinto, a Washington, D.C. law firm specializing in employment law, represents whistleblowers in the United States. Washingtonian Magazine, in its December 2004 issue, named the firm the top whistleblower within the Beltway. The three partners are brothers Stephen M. Kohn, Michael...
, requested a rehearing of the July 2007 decision by the full Court of Appeals (en banc) for the District of Columbia Circuit, which was denied on September 14, 2007. On December 17, 2007, Murphy filed a petition with the U.S. Supreme Court asking for a review of the decision of the Court of Appeals. The Supreme Court denied review of the decision on April 21, 2008.
External links
- Murphy v. IRS (August, 2006 opinion)
- Murphy v. IRS, on rehearing (July 3, 2007)
- "Murphy and the 16th Amendment, by Phil Hart (on Hart's Constitutional Income Web site
- Tax Analysts coverage of Murphy v. IRS