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