Whistleblower Lawyer & Attorney : National Whistleblower Legal Defense and Education Fund : Whistlebower Protection, Fraud Claims : Washington DC

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NATIONAL WHISTLEBLOWER CENTER

FOR IMMEDIATE RELEASE
APRIL 21, 2008

U.S. Supreme Court Refuses to Hear Murphy v. IRS
Advocates To Continue Pressing for Changes in Civil Rights Tax Law

WASHINGTON, DC -- Today, the United States Supreme Court announced its decision not to grant certiorari in the case of Murphy v. IRS. The order, posted on the Court's website this morning, means that the IRS can continue to tax non-pecuniary compensatory damages awarded to victims of whistleblower retaliation and other civil rights violations. These damage awards, which are intended to make the victim "whole" again, include payments for loss of reputation and emotional distress.

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 Whistleblower 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.

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The case was brought by Marrita Murphy, an environmental whistleblowerwho won before the Department of Labor, and was awarded only compensatory damages to vindicate her rights under six federal environmental whistleblower statutes, and none of her damages were for lost wages. Murphy filed a tax refund suit when the IRS demanded that she pay taxes on the "make-whole" award.

The ruling in Murphy v. IRS will affect thousands of past and future victims of civil rights violations and whistleblower retaliation who are awarded compensatory damages for personal injuries. The following summarizes the arguments made on behalf of Ms. Murphy in the reply brief.

In her reply brief, Murphy argues that the D.C. Circuit’s final decision in Murphy v. IRS violates the “accession to wealth” test, which specifies that in order for damages to be within the scope of the “gross income” statute, 26 U.S.C. § 61(a), there must be some “accession” to the taxpayer’s wealth. Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430 (1955). The D.C. Circuit’s final decision conflicts with this controlling precedent and a long line of authorities holding that damages awarded to make a person “whole” or to restore a personal loss are not “income” or an “accession to wealth.”

Since the enactment of the modern tax code between 1913 and 1918, numerous court and administrative rulings held that personal injury damages, including compensatory damages for non-physical personal injury losses, are not “income.” The scope of the “gross income” statute (codified at 26 U.S.C. § 61(a)) and the subsequent versions of the personal injury statutory exclusions were expressly based on the limitations set forth in the Sixteenth Amendment. Any tax on damages that are not income is not a tax within the scope of those statutes and the Sixteenth Amendment.

Notably, the D.C. Circuit never held that the compensatory damages awarded to Murphy for emotional distress and loss of reputation are “income” under the controlling “accession to wealth” test under Glenshaw Glass. Instead, the court of appeals initially held in Murphy I that Murphy’s damages did not meet this test and were not “income,” but after vacating that decision, the D.C. Circuit decided that 26 U.S.C. § 61(a) was amended “by implication” to include this type of non-physical personal injury damages as “gross income” without deciding the “accession to wealth” test required by Glenshaw Glass. Simply put, gross income under Section 61(a) cannot include damages for non-physical injuries without satisfying the “accession to wealth” test.

The court of appeals in Murphy II, invented the fiction of an excise tax in this case, in an attempt to avoid the required “accession to wealth” test. After holding that Congress amended Section 61(a) “by implication” when it amended Section 104(a)(2) in 1996, the Murphy II court went on to uphold this imagined tax under Article I of the U.S. Constitution. In continuing its fiction of a judicially created excise tax, the court of appeals held that the excise was imposed on the “privilege” of using the “legal system” to “vindicate a statutory right.” To be sure, this is the first case in which any court has judicially created an excise tax on the right to use the legal system to vindicate a federal statutory right. However, the very troubling implications of such a tax on civil rights plaintiffs, whistleblowers and tort victims are so enormous as to warrant review by the Supreme Court.

A straightforward application of Glenshaw Glass shows that Murphy’s damages are not income because they were awarded to make her “whole” and to restore a personal injury or human capital loss. Murphy was not enriched by receiving “make whole” compensatory damages.

Murphy also argues that Supreme Court review is warranted to address important questions of federal law resulting from the 1996 amendments to the personal injury exclusion, 26 U.S.C. § 104(a)(2). The type of compensatory personal injury damages at issue here are commonly awarded under numerous federal anti-discrimination and anti-retaliation statutes, as well as in state tort actions. If these damages are taxed the government not only deprives the plaintiff of a “make whole” remedy to compensate for personal injury losses, such as emotional distress and damage to reputation, but there exists confusion about the applicability of the personal injury exemption in cases where the plaintiff also suffers a physical injury of physical sickness as well as emotional distress.

Unquestionably, the D.C. Circuit decided an important question of federal law in a manner that calls for this Court’s review. The taxing of personal injury damages in light of the 1996 amendments to Section 104(a)(2) affects not only the tax bar, but impacts employment law, torts, whistleblower law, and civil rights. Review by the Supreme Court is needed to resolve whether “make whole” personal injury damages are not income and not taxable.

• Click here to view the brief (PDF)
• Click here for more articles on Murphy v. IRS