Murphy v. IRS

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.

The Court had issued its original opinion, written by Chief Judge Douglas H. Ginsburg and joined by Judges Judith Rogers and Janice Rogers Brown, on August 22, 2006. The opinion had struck down 26 U.S.C. § 104(a)(2) 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.

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