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Murphy v. IRS - 377 U.S. App. D.C. 197, 493 F.3d 170 (2007)


Damages received for emotional distress are not listed among the examples of income in I.R.C. § 61 and an ambiguity in the meaning of a revenue-raising statute should be resolved in favor of the taxpayer. A statute is to be read as a whole, however, and reading § 61 in combination with I.R.C. § 104(a)(2) presents a very different picture -- a picture so clear that a court has no occasion to apply the canon favoring the interpretation of ambiguous revenue-raising statutes in favor of the taxpayer. In 1996 the Congress amended § 104(a) to narrow the exclusion to amounts received on account of "personal physical injuries or physical sickness" from "personal injuries or sickness," and explicitly to provide that emotional distress shall not be treated as a physical injury or physical sickness, thus making clear that an award received on account of emotional distress is not excluded from gross income under § 104(a)(2). Small Business Job Protection Act of 1996, Pub. L. No. 104-188, § 1605, 110 Stat. 1755, 1838.


Taxpayer Marrita Murphy brought this suit to recover income taxes she paid on the compensatory damages for emotional distress and loss of reputation that she had been awarded in an administrative action she brought against her former employer. Murphy contended that under § 104(a)(2) of the Internal Revenue Code (IRC), 26 U.S.C. § 104(a)(2), her award should have been excluded from her gross income because it was compensation received "on account of personal physical injuries or physical sickness." She also maintained that, in any event, her award is not part of her gross income as defined by § 61 of the IRC26 U.S.C. § 61. Finally, she argued that taxing her award subjects her to an unapportioned direct tax in violation of Article I, Section 9 of the Constitution of the United States. A United States Court of Appeals for the District of Columbia Circuit panel, holding that Murphy’s compensatory damages award was not exempt under I.R.C. § 104(a)(2), and not "income" under the Sixteenth Amendment, reversed the grant of summary judgment to appellees United States and Internal Revenue Service (IRS). The government's motion for rehearing en banc was granted.


Did the appellate court panel err in holding that Murphy’s compensatory damages award was not exempt under I.R.C. § 104(a)(2), and not "income" under the Sixteenth Amendment?




The Court of Appeals for the D.C. Circuit held that the award was not received on account of personal physical injuries excludable from gross income under I.R.C. § 104(a)(2). Although she may have suffered physical symptoms of stress, the award focused on mental pain and anguish. Gross income under I.R.C. § 61 included compensatory damages for non-physical injuries. The court had to presume that when I.R.C. § 104(a) was amended in 1966, the presumption that it was intended to have real and substantial effect suggested that I.R.C. § 61 was to be read to include an award for nonphysical harms. Thus, § 61 implicitly included a nonphysical damages award such as the taxpayer received, regardless if it was an accession to wealth. A tax upon such damages was within Congress's power. The taxpayer was taxed only after receiving a compensatory award, thus, it was akin to a duty upon the facilities made use of and actually employed in the transaction. The tax laid upon an award of damages for a nonphysical personal injury operated with "the same force and effect" throughout the United States and therefore, under U.S. Const. art. I, § 8, cl. 1, was uniform.

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