| The dramatic life of the Murphy case came to a quiet | | | | whistleblower damages were taxable. The Court |
| end when the U.S. Supreme Court declined to hear the | | | | adopted the IRS's baseless argument. The IRS urged |
| case which signaled the taxation of personal injury | | | | the Court to treat damages to people differently from |
| damages. | | | | damages to property. The IRS contended that |
| The U.S. Appeals Court for the D.C. Circuit shocked | | | | compensation awarded to a person for the loss of an |
| the tax world with its initial Murphy decision, in which it | | | | arm or a leg was not payment to make a person |
| ruled that damages awarded a whistleblower were | | | | "whole" but was payment obtained as part of a |
| not taxable under the Constitution. Murphy filed a | | | | "forced sale" In other words, if a person suffered a |
| complaint with the Department of Labor alleging that | | | | mental breakdown after witnessing her/his child being |
| her former employer, the New York Air National | | | | murdered, payment for that mental breakdown was |
| Guard (NYANG), in violation of various whistle-blower | | | | taxable - as the victim (according to the IRS) simply |
| statutes, had "blacklisted" her and provided unfavorable | | | | was "forced" to sell his or her mental health, and |
| references to potential employers after she had | | | | obtained "income" based on the forced sale theory. |
| complained to state authorities of environmental | | | | In a remarkable reversal of its prior decision, the Court |
| hazards on a NYANG airbase. The Secretary of | | | | adopted this baseless argument. The Court held that |
| Labor determined the NYANG had unlawfully | | | | "Murphy's situation seems akin to an involuntary |
| discriminated and retaliated against Murphy. Murphy | | | | conversion of assets; she was forced to surrender |
| submitted evidence that she had suffered both mental | | | | some part of her mental health and reputation in return |
| and physical injuries as a result of the NYANG's | | | | for monetary damages." As a result of the U. S, |
| blacklisting her. Upon finding Murphy had also suffered | | | | Supreme Court's rejection of Murphy's appeal, plaintiffs |
| from other "physical manifestations of stress" including | | | | must pay taxes on compensatory damages for |
| "anxiety attacks, shortness of breath, and dizziness," | | | | emotional distress or loss of reputation, if those |
| the ALJ recommended compensatory damages | | | | damages are caused by employment discrimination or |
| totaling $70,000, of which $45,000 was for "emotional | | | | retaliation. The court has reasoned that the original |
| distress or mental anguish," and $25,000 was for | | | | harm is not personal injury but is akin to the taking of |
| "injury to professional reputation" from having been | | | | property and therefore is taxable. Plaintiff's attorneys |
| blacklisted. None of the award was for lost wages or | | | | cannot argue in an employment case that the |
| diminished earning capacity. | | | | settlement agreement should state that a portion of |
| Surprisingly, the three-judge U. S. Appeals Court for the | | | | damages be considered 'personal injury or emotional |
| D. C. Circuit quietly withdrew its original decision and | | | | distress' in order to escape the tax man. That |
| issued a more conventional ruling holding that the | | | | argument will no longer work with Big Brother IRS. |