D.C. Circuit Rules Compensatory Damages for Non-Physical Personal Injuries are not Taxable

On August 22, 2006, the United States Court of Appeals for the District of Columbia Circuit, in Marrita Murphy and Daniel J. Leveille v. Internal Revenue Service and United States of America, held that Section 104(a)(2) of the Internal Revenue Code was unconstitutional insofar as it permits the taxation of compensation for a non-physical personal injury that was unrelated to lost wages or earnings. In so holding, the Court of Appeals reversed a lower court decision granting summary judgment for the Government and the Internal Revenue Service, and ruled that the Government must be ordered to refund the taxes the taxpayer paid on her award plus applicable interest.