The Solicitor General has filed the Government’s brief in opposition to the granting of certiorari in a key Whistleblower/Civil Rights tax case that was filed with the Supreme Court by attorneys working with the National Whistleblower Center. The case is Murphy v. IRS, No. 07-802 (Supreme Court).
The principal issue is whether the IRS can tax as “income” plaintiffs’ court awards for non-physical compensatory damages, such as “make whole” awards for emotional distress and loss of reputation.
The case was brought by Marrita Murphy, an environmental whistleblower who won before the Department of Labor, and was awarded only compensatory damages to vindicate her rights under six federal environmental whistleblower statutes, and none of her damages were for lost wages. Murphy filed a tax refund suit when the IRS demanded that she pay taxes on the "make-whole" award.
In its brief, the Government argues that it may tax “make whole” damages to restore personal injury losses for emotional distress and damage to reputation. However, such damages were never considered income or taxed prior to 1996, and Congress has not changed the gross income statute or enacted any tax levying statute to specifically tax compensatory damages. The Government’s argument essentially equates “make whole” compensatory damages for personal injury losses to lottery winnings or windfalls, and ignores that damages for personal injury are not income.
The ruling in Murphy v. IRS will affect thousands of past and future victims of civil rights violations and whistleblower retaliation who are awarded compensatory damages for personal injuries.
