Murphy v. Internal Revenue Service
2007 WL 1892238, 377 U.S. App. D.C. 197, 493 F.3d 170 (2007)
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Rule of Law:
Compensatory damages for non-physical personal injuries are included in gross income under § 61 of the Internal Revenue Code. The taxation of such damages is a constitutional exercise of Congress's power to lay and collect uniform excise taxes and is not an unconstitutional direct tax requiring apportionment.
Facts:
- Marrita Murphy worked for the New York Air National Guard (NYANG).
- After Murphy complained to state authorities about environmental hazards on a NYANG airbase, the NYANG 'blacklisted' her and provided unfavorable references to her potential employers.
- An administrative psychologist testified that as a result of the blacklisting, Murphy suffered both 'somatic' and 'emotional' injuries, including bruxism (teeth grinding), anxiety attacks, shortness of breath, and dizziness.
- The Department of Labor's Administrative Review Board awarded Murphy $70,000 in compensatory damages, specifically allocating $45,000 for 'past and future emotional distress' and $25,000 for 'injury to vocational reputation.'
- None of the award was for lost wages or diminished earning capacity.
Procedural Posture:
- Marrita Murphy filed an administrative complaint against the New York Air National Guard with the Department of Labor.
- An Administrative Law Judge recommended, and the Department of Labor Administrative Review Board later affirmed, a $70,000 compensatory award for Murphy.
- Murphy paid income tax on the award, then filed an amended return with the IRS seeking a refund, which was denied.
- Murphy sued the United States and the IRS in the U.S. District Court for the District of Columbia, seeking a refund and injunctive relief.
- The district court granted summary judgment in favor of the Government.
- Murphy, as appellant, appealed to the U.S. Court of Appeals for the D.C. Circuit, where the United States was the appellee.
- An initial panel of the D.C. Circuit reversed the district court's judgment.
- The same panel then sua sponte vacated its own judgment to rehear the case based on a new constitutional argument raised by the Government in its petition for rehearing en banc.
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Issue:
Does taxing a compensatory award for non-physical personal injuries, such as emotional distress and loss of reputation, violate the Internal Revenue Code or the U.S. Constitution's prohibition on unapportioned direct taxes?
Opinions:
Majority - Chief Judge Ginsburg
No, taxing a compensatory award for non-physical personal injuries does not violate the Internal Revenue Code or the U.S. Constitution. The court held that Murphy's award was taxable for three primary reasons. First, under § 104(a)(2) of the IRC, the award was not excludable from gross income because it was not received 'on account of personal physical injuries.' Applying the strong causal connection test from O’Gilvie v. United States, the court found the damages were awarded because of her emotional distress and reputational harm, not because of her physical symptoms like bruxism; the physical manifestations were merely evidence of the severity of her emotional distress. Second, the award is part of gross income under § 61 of the IRC. The 1996 congressional amendment to § 104(a)(2), which explicitly made awards for emotional distress taxable by narrowing the exclusion to 'physical' injuries, would be rendered meaningless if such damages were not considered part of gross income in the first place. Third, the tax is constitutionally permissible under Article I, Section 8. It is not a direct tax requiring apportionment but rather an indirect excise tax laid upon the transaction of receiving the award, which is akin to other constitutional excises on privileges or activities like gifts or inheritances. The tax is uniform throughout the United States and therefore constitutional.
Analysis:
This decision solidifies the IRS's authority to tax awards for non-physical injuries, effectively closing a potential loophole based on a 'human capital' theory of recovery. By classifying the tax as an excise tax on a transaction rather than a direct tax on property, the court sidestepped a complex constitutional debate about the meaning of 'income' under the Sixteenth Amendment and the historical scope of direct taxes. This transactional approach provides a robust framework for Congress to tax various economic receipts without facing apportionment challenges, thereby reinforcing a broad interpretation of the federal taxing power under Article I.
