DC Court Says Emotional Distress Awards Aren’t “Income,” and Can’t Be Taxed
From TaxProf Blog (HT Instapundit):
The D.C. Circuit held today, in Murphy v. United States (PDF here), No. 03cv02414 (D.C. Cir. 8/22/06), that § 104(a)(2) is unconstitutional under the 16th Amendment as applied to a recovery for a non-physical personal injury (emotional distress and loss of reputation) unrelated to lost wages or earnings. Murphy received $70,000 from New York State for anxiety suffered and injury to her reputation as a result of being “blacklisted” after becoming a whistleblower against her employer (the New York Air National Guard).
The politics that went into the law make this decision deliciously ironic. As I recall, the Gingrich Revolution Republican Congress passed legislation that included taxation of personal injury awards for the first time in the mid-1990s (this link has what the law in this area has been since August 21, 1996).
Now the taxation of personal injury awards has been (for the moment) thrown out by a three judge D.C. Circuit panel consisting of Chief Judge Douglas Ginsburg, Judge Judith Rogers, and ….. (irony of ironies) conservative heroine Judge Janice Rogers Brown. Something tells me that this decision, especially if overturned (commenters at Volokh mostly don’t think the decision will survive appeal; Balkinization thinks the ruling was incomplete), will not help her if she is ever nominated for the Supreme Court.
