The attorneys for Marrita Murphy today filed a Petition for Rehearing En Banc in the D.C. Circuit, requesting that the full court review the three-judge panel’s July 3, 2007 decision in Murphy v. IRS, No. 03cv02414, which upheld the taxation of Mrs. Murphy’s compensatory personal injury award (and rejected the panel’s original decision in Murphy v. IRS, 460 F.3d 79 (D.C. Cir. 8/22/06)).  From the press release:

Rather than overrule its prior decision (Murphy v. IRS, Aug. 22, 2006) holding that taxing Murphy’s damages was unconstitutional, the panel simply held that Congress intended to amend the tax code “by implication” to tax personal injury damages under its authority to create an excise tax on people who use the courts to vindicate their rights. No court in the history of the United States has ever upheld such an implied tax.

In a remarkable ruling, the Court held that compensation for damages for emotional distress suffered by a whistleblower were not paid to make the employee “whole,” but were instead paid as part of a “forced sale” which Congress could tax under its excise tax authority. The Court reasoned:  “Murphy’s situation seems akin to an involuntary conversion of assets; she was forced to surrender some part of her mental health and reputation in return for monetary damages.”

Attorneys for Marrita Murphy have asked the full U.S. Court of Appeals for the D.C. Circuit to reconsider the panel’s holding because it conflicts with Supreme Court and other legal precedent, and it raises questions of exceptional importance.

"The Court’s reversal stands reality on its head," said David K. Colapinto, who argued on behalf of Ms. Murphy. “This case marks the first time that a court has interpreted the gross ‘income’ statute, 26 U.S.C. § 61(a), to be amended ‘by implication’ to create a tax not expressly enacted by Congress. Additionally, this is the first time that any court has construed the tax code to imply an “excise tax” on the ‘privilege’ of utilizing the ‘legal system’ to vindicate a federal statutory right,” Colapinto added.

"When whistleblowers suffer retaliation, they do not ‘sell’ their mental health. If people are injured in a car accident, they do not ‘sell’ their arms and legs. These are real human losses, and compensation to restore that human loss was never intended to be ‘income’ under our Constitution or the tax code," Colapinto said.