Supreme Court Asked to Decide Whether Emotional-Distress Damages Are Taxable
The U.S. Supreme Court is being urged to accept a case that asks whether the federal government has the power to tax an award for emotional distress.
Lawyers for Marrita Murphy, an environmental whistle-blower who was awarded $70,000 for emotional distress, claim the government may not tax awards that are compensation for physical loss rather than income, as defined by the 16th Amendment, the TaxProf blog reports.
Muphy had contended that the government blacklisted her with potential employers after she complained about environmental hazards at an Air National Guard base, SCOTUSblog reports.
“The writ should be granted to resolve uncertainties about whether personal injury damages are taxable and decide, consistent with nearly 80 years of case law, that the ‘make whole’ personal injury damages are not ‘income,’ and thus are not taxable,” according to the cert petition (PDF posted by TaxProf blog via Whistleblower Protection Blog).
The U.S. Court of Appeals for the D.C. Circuit flip-flopped in the case, originally ruling for Murphy but ruling for the government in a rehearing. The court said it granted a rehearing based on a new government argument that the tax is indirect and uniform, and thus permitted under Article 1, Section 8, of the Constitution permitting excise taxes.
A press release (PDF) says the D.C. Circuit’s second ruling is the first time a court has construed the tax code to imply an excise tax on the privilege of using the legal system to vindicate a federal statutory right.
