Archive for the ‘Murphy decision’ Category


Tuesday, April 22nd, 2008 by Joe Kristan

The dramatic life of the Murphy case came to a quiet end yesterday when the U.S. Supreme Court declined to take the case.
The U.S. Appeals Court for the D.C. Circuit shocked the tax world with its initial Murphy decision, in which it ruled that damages awarded a whistleblower were not taxabe under the Constitution. The initial D.C. Circuit decision implied that any item not considered “income” in 1913 could not be subject to an income tax today.
Most tax students criticized the Murphy decision, and the three-judge panel quietly withdrew its decision and issued a more conventional ruling holding that the whistleblower damages were taxable.
A whistleblower advocacy group issued a press release that blames “pressure from the Bush administration” for the D.C. Circuit’s reconsideration of its own decision. That’s a strange way to describe near-universal criticism by the tax bar, unless Karl Rove’s tentacles extend further than I would have ever guessed.
The TaxProf rounds things up.
Link: Complete Tax Update coverage of Murphy.



Wednesday, March 19th, 2008 by Joe Kristan

The taxpayer in the controversial Murphy decision asked the U.S. Supreme Court to review the case. The TaxProf reports that the government has filed its reply brief to the request for review.
The Murphy case briefly threatened much tax law that had long been taken for granted, until the D.C. Court of Appeals, which initially held for the taxpayer, changed its mind. I expect the Supreme Court to decline to hear the case.
Link: Tax Update coverage of Murphy.



Monday, December 17th, 2007 by Joe Kristan

Marrita Murphy, the whistleblower who rocked the tax world when she won a since-reversed decision ruling that taxing her damage award was unconstitutional, has asked the Supreme Court to hear her case.
Gregory Germain examines the Murphy certiorari petition at the TaxProf Blog today.

In sum, I would be very surprised if the Supreme Court granted this petition. Most of Ms. Murphy



Friday, September 28th, 2007 by Joe Kristan

The Federal Appeals Court for the DC Circuit buried it’s controversial Murphy decision over the summer. Before the DC court changed its mind, Murphy said emotional damages — and potentially many other items now subject to income tax — were tax exempt because they weren’t “income” when the income tax was enacted in 1913.
Yesterday the Tax Court danced on Murphy’s grave. Paul Ballmer received a $337,000 emotional damages award in 2001 and failed to pay any income taxes on it. The IRS caught up with him, assessing tax and penalties. Mr. Ballmer cited the defunct original Murphy decision in trying to convince the Tax Court not to assess tax, or at least penalties.
The Tax Court seems to believe that Mr. Ballmer had no intention of paying tax on his award from the start, and his reliance on Murphy was a last-minute improvisation:

On cross-examination, petitioner admitted that he had not reviewed the flush language of section 104(a), which provides “emotional distress shall not be treated as a physical injury or physical sickness” for purposes of excluding damages received from gross income under section 104(a)(2). Petitioner further admitted that he had not sought the advice of a tax professional in regard to his conclusions that no provision of the Code required him to file a return or that the damages he received were not income.
Petitioner’s attempt to cloak his argument of reasonable cause in the initial Murphy decision is also unpersuasive. First, as discussed above, the Court of Appeals for the D.C. Circuit vacated its initial decision and has since determined that damages for emotional distress are gross income. Further, there is no evidence before the Court that petitioner performed an analysis similar to that of the D.C. Circuit, nor that he received any advice from a competent tax professional, at the time he chose not to file a return for 2001.

Mr. Ballmer may have fallen for tax protest arguments:

Petitioner further testified that he had reviewed the Internal Revenue Code for several years and could find no provision that required him to file a return

The “years of study” line is a standard tax protestor catchphrase (see here, for example). It’s amazing that you can spend so much time with the Code without coming across Section 6012.
Cite: Ballmer, T.C. Memo 2007-295.
Link: Tax Update Murphy coverage
UPDATE: The TaxProf has more.



Tuesday, September 18th, 2007 by Joe Kristan

The Federal Appeals Court for the D.C. Circuit has turned down the appeal for the rehearing of the Murphy case. That means the case, which at one time seem poised to disrupt decades of federal tax law before the D.C. panel reversed itself, is final, barring an unlikely Supreme Court reversal.
The TaxProf and the TaxGirl have more.



Friday, July 6th, 2007 by Joe Kristan

The Tax Prof has rounded up learned opinion on this week’s new Murphy decision (update: link fixed). Bryan Camp of Texas Tech focuses on something I had noticed: how the court blames the government’s attorneys for the initial bad opinion.

I read the opinion as a HUGE CYA and nothing more. I think this paragraph is of signal importance to understanding why the opinion reads as it does:

Murphy appealed the judgment of the district court with respect to her claims under ? 104(a)(2) and the Sixteenth Amendment. In Murphy v. IRS, 460 F.3d 79 (2006), we concluded Murphy’s award was not exempt from taxation pursuant to ? 104(a)(2), id. at 84, but also was not “income” within the meaning of the Sixteenth Amendment, id. at 92, and therefore reversed the decision of the district court. The Government petitioned for rehearing en banc, ARGUING FOR THE FIRST TIME, even if Murphy’s award is not income, there is no constitutional impediment to taxing it because a tax on the award is not a direct tax and is imposed uniformly. In view of the importance of THE ISSUE THUS BELATEDLY RAISED, the panel sua sponte vacated its judgment and reheard the case. …[self-serving cites omitted]…In the present opinion, we affirm the judgment of the district court BASED UPON THE NEWLY ARGUED GROUND that Murphy’s award, even if it is not income within the meaning of the Sixteenth Amendment, is within the reach of the congressional power to tax under Article I, Section 8 of the Constitution.

I love his conclusion:

If I’m reading this right, it is not a satisfactory opinion at all, with all its dodging and weaving and sanctimonous crapola about the government raising a “new” argument.

Is “crapola” a legal term?
Link: Complete Tax Update Murphy Coverage.



Thursday, July 5th, 2007 by Joe Kristan

The TaxProf has his trademark comprehensive roundup of the Federal Circuit’s reversal of its own decision exempting whistleblower damages from federal taxes.
Our report on the new decision is here.



Tuesday, July 3rd, 2007 by Joe Kristan

The “National Whistleblower Center” reports that the Federal appellate panel that issued the spectacular Murphy decision — the one ruling the taxation of personal injury damages unconstitutional — has changed its mind. The panel from the U.S. Federal Circuit Court of Appeals, which withdrew its much-criticised decision in late December, today issued a new decision holding that such damages are taxable.
I haven’t yet found the actual updated decision; I will link it as soon as I do. The original decision seemed likely to unleash a wave of litigation on the scope of the term “income” under the constitution, as it implied that only items considered “income” in 1913 could be subject to the income tax.
Practitioners and academics mostly were appalled by the original decision. The three-judge panel withdrew its original decision after the full circuit had signaled that it would likely reconsider the decision.
Today’s decision
Full Tax Update Murphy Coverage
How Appealing has a post on this:

Today’s ruling may strike many as unremarkable, and indeed it would be if this same three-judge panel, in August 2006, had not issued a decision in this very case holding that “insofar as ?104(a)(2) permits the taxation of compensation for a personal injury, which compensation is unrelated to lost wages or earnings, that provision is unconstitutional.”

The Wall Street Journal Law Blog also has coverage:

“Why are you bothering us with a tax case just hours before the Fourth of July!?” you?re surely asking. ?Go home Law Blog!?
Well we care for a couple of reasons. First, it’s rare for a three-member appeals court panel to agree to rehear a case and then reverse itself. Last August, the same three judges ruled that the award didn?t represent “income” as defined by the 16th Amendment ? and thus wasn?t taxable. The court had also called ?unconstitutional? a 1996 provision in the tax code that permitted taxation of damage awards for mental distress and loss of reputation. In December, the panel vacated its judgment and said it would rehear the case. (The more common scenario would have been for the entire D.C. Circuit to review the decision ? i.e., en banc,)
Second, the ruling is a significant win for the IRS. The original ruling last year had set off a firestorm, causing tax lawyers and professors their own emotional distress, with most lambasting the decision. “Let 1000 lawsuits bloom,” wrote UCLA law professor Stephen Bainbridge on his blog. Yale law professor Michael Graetz said the case would “launch a thousand [other] constitutionality arguments that people would have thought laughable before.”

One thing this case teaches us: the Courts are hip to the public relations technique of issuing embarrassing news at holiday times, when it is least likely to attract attention. The panel withdrew its original decision on December 22, the Friday before Christmas; maybe there’s another explanation for the issuance of the new decision today, but the cynical explanation does fit the data.



Wednesday, February 21st, 2007 by Joe Kristan

Murphy’s law doesn’t work in the Tax Court.
Marcia Green was a non-tenured Humanities instructor at San Francisco State University. She filed a discrimination complaint after she was turned down for a tenured position. The complaint wasn’t upheld and the university stopped assigning her to teach courses. She sued and in 2002 won a $2.3 million judgement when the jury found the university retaliated against her because of her discrimination complaint.
Ms. Green filed a 2002 Form 1040 that omitted her lawsuit proceeds. The IRS disagreed with her position and assessed her a $909,000 tax deficiency and a $181,000 “accuracy-related” penalty. The accuracy related penalty applies when you understate your liability by 20% or more without reasonable cause.
Since 1996 the Internal Revenue Code has stated that personal injuries can be excluded from income only when they are for “physical” injuries. Before it withdrew its own decision, the Federal Circuit Court of Appeals held in Murphy that the 1996 provision was unconstitutional.
The Tax Court ruled against Ms. Green yesterday. The Tax Court didn’t discuss the Murphy case in its decision; in fact, it ignored Murphy’s “return of human capital” argument entirely. The opinion simply stated that the damages are income under the long-standing Glenshaw Glass reasoning. The 1996 change in the law required damages to be “physical” to qualify for exclusion. They weren’t, so they didn’t, and the taxpayer lost.
By imposing the accuracy-related penalty, the court seems to say that the Murphy logic wasn’t even enough to pass the laugh test. That may not be entirely accurate; its decision might simply be saying that she didn’t rely on professional advice when she decided to not report the income. Even so, it doesn’t look like the Tax Court is very impressed with the Murphy rationale.
Cite: Green, T.C. Memo 2007-39.
Link: Complete Tax Update Murphy coverage.



Tuesday, February 20th, 2007 by Joe Kristan

The TaxProf notes that John Fatino of the Whitfield and Eddy law firm has published “The Tax Treatment of Verdicts and Settlements Following the Adoption of the Jobs Creation Act of 2004: Paradise Found for the Employment Lawyer?” in the Northern Illinois University Law Review. It covers the issues that rose to prominence following the now-withdrawn Murphy decision on whistleblower damages.
Mr. Fatino seems to think that the original Murphy logic may hold up:

Shortly before this article went to press, a panel of the United States Circuit Court of Appeals for the District of Columbia held ? 104(a)(2) unconstitutional, in so far as it permits the taxation of an award of damages for mental distress and loss of reputation, because such items would not have been income to the framers of the Sixteenth Amendment to the United States Constitution. Practitioners should closely examine this opinion for additional grounds of attack on the taxation of physical and non-physical injuries. Moreover, there is an excellent discussion as to whether a payment on account of physical injury is compensation for loss of capital.

Congratulations to Mr. Fatino for his work and for getting published.