Statute Which Subjects an Award for Emotional Distress/Injury to Personal Reputation to Taxation Found UnConstitutional – Court Reverses Itself in Marrita Murphy Case

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, 460 F.3d 79 (2006), had held that Section 104(a)(2) of the Internal Revenue Code was unconstitutional insofar as it permitted the taxation of an award for a personal injury and that was unrelated to lost wages or earnings – that is, that such an award was not “income” within the intendment of the Sixteenth Amendment of the United States Constitution and, thus, was not an amount that Congress was empowered to tax. In so holding, the court reversed the decision of the United States District Court for the District of Columbia granting summary judgment for the Government and remanded the case back to the District Court to enter an order and judgment instructing the Government to refund the taxes the taxpayer paid on her award plus applicable interest. For a summary of the facts of the case and the court’s August 22, 2006 decision, please see our August 2006 One Minute Memo entitled, “Statute Which Subjects an Award for Emotional Distress/Injury to Personal Reputation To Taxation Found Unconstitutional.”

Following this decision, the Government petitioned the court for a rehearing en banc (and arguing for the first time that even if the award was not “income” within the meaning of the Sixteenth Amendment, there was still no constitutional impediment to taxing the award by reason of the subject tax not being a “direct tax” and which was imposed uniformly) and, on December 22, 2006, the court, on its own motion, vacated its August 22, 2006 judgment and agreed to rehear the case. Following the re-hearing, the court, on July 3, 2007, affirmed the District Court’s decision granting summary judgment for the Government based upon this new constitutional argument raised by the Government.