Academic journal article Journal of Accountancy

D.C. Circuit Switches Position in Murphy

Academic journal article Journal of Accountancy

D.C. Circuit Switches Position in Murphy

Article excerpt

The Court of Appeals for the D.C. Circuit recently reissued its opinion in Murphy, Marrita v. IRS (see "Tax Matters," JofA, Feb. 07, page 70). The original opinion was released in August 2006, and vacated in December 2006, after the IRS requested a rehearing en banc. The request was denied; however, the same panel agreed to rehear the case, this time reaching a different decision.

The case arose after the taxpayer sued her former employer when she was blacklisted for being a whistleblower. The administrative law judge awarded her damages for emotional distress and injury to professional reputation. Although the taxpayer suffered physical ailments as a result of her emotional distress, none of the damages were specifically labeled as being for such physical injuries. The taxpayer attempted to exclude the damages under IRC [section] 104(a)(2), and the IRS disallowed the exclusion because the damages were not paid on account of physical injuries. The taxpayer argued that because physical injuries resulted from her emotional distress, the damages were excludable.

Consistent with its original opinion, the D.C. Circuit held that the damages could not be excluded under section 104(a) because they were not paid "on account of" physical injury This time the court elaborated on its position. Citing the Supreme Court in O'Gilvie v. U.S., the court stated that there must be a strong causal connection between the physical injury and the damages. Since the taxpayer could not demonstrate that the damages were a direct result of the physical injuries, she was not entitled to the exclusion.

Exclusion aside, the taxpayer alternatively argued that the damages did not constitute income within the 16th Amendment, and taxation of such damages was therefore unconstitutional. …

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