Murphy v. Internal Revenue Service
United States Court of Appeals for the District of Columbia Circuit
493 F.3d 170 (2007)
Marrita Murphy (plaintiff) was unlawfully fired from her New York Air National Guard job after reporting environmental hazards, and after filing a retaliation complaint with the Department of Labor, an administrative law judge awarded her $70,000 — $45,000 for emotional distress and $25,000 for reputational harm — even though Murphy also testified to physical manifestations of her emotional distress. She initially paid taxes on the award, then sought a refund from the IRS (defendant), arguing the award was either excluded from gross income as compensation for physical injury or fell outside the statutory definition of gross income altogether, and separately arguing the tax was an unconstitutional unapportioned direct tax; the IRS denied the refund, the district court ruled for the government, and a three-judge panel of the D.C. Circuit initially reversed, holding the award wasn't taxable income at all, before the full court granted rehearing en banc.
Whether monetary damages a taxpayer receives for non-physical mental injuries, such as emotional distress and reputational harm, are included in gross income for federal tax purposes, and whether the resulting tax is an unconstitutional direct tax.