I enjoy commentary on my blog posts, especially when those who are adding to the discussion have something to say – you know, actually adding to the conversation. I also don’t mind being corrected when I’m wrong. I don’t claim to be the sole expert on all things tax (though that does have a nice ring to it, doesn’t it?).
Apparently, I mischaracterized some of what went on in Murphy v. IRS – and the attorney for Ms. Murphy is not happy. He is even more unhappy because some of my colleagues are referring to my piece in their posts.
With that in mind, I am posting a clarification of my prior post. I take issue with some of Mr. Colapinto’s comments about the inaccuracy of my piece. I stand by the facts. I referred to a number of sources when writing that piece, not the least of which were several articles about the case from newspapers and other tax professionals and I read both opinions (again, it’s been on my radar since last year).
As we no doubt know now, Marrita Murphy was represented by prolific commenter of tax blogs, David K. Colapinto. He also handled the appeal.
As previously reported, Murphy was the recipient of an award in a whistle-blower suit. The total award was $70,000 for emotional distress and loss of professional reputation (if you read the opinion, the initial argument included the ‘it ruined my life, made my marriage difficult and gave me panic attacks’ variety of arguments – for which she was not compensated). As a result, she received a tax bill from the IRS for $20,665.
Murphy filed suit against IRS, claiming that the award should be exempt from taxation. The court first ruled that the damages were not to compensate for “personal physical injuries” and were not exempt from taxation. The court then surprisingly accepted Murphy’s argument that the award was to make her “emotionally and reputationally ‘whole’ and not to compensate her for lost wages or taxable earnings of any kind” and then declared that to be not subject to taxation, which sent a collective “whaaaa?” around the tax world.
This year, the court reversed its own decision. The court agreed with its prior decision that the damages were solely for non-physical injuries stating conclusively that “Murphy’s damages were not ‘awarded by reason of, or because of, …[physical] personal injuries.’” Additionally, the court declared that compensatory damages for non-physical injuries are not exempt from taxation.
Mr. Colapinto’s main argument with my analysis seems to be that I characterized Ms. Murphy’s award as a windfall to her, and therefore clearly taxable. I suggested that these kinds of awards are really a punishment to the defendant, rather than compensation to the plaintiff – an argument that the award was more to make a point than to make her whole. I’m not the only one. The government actually argued that Murphy “undeniably had economic gain because she was better off financially after receiving the damages award than she was prior to receiving it” – and not just that she was being made whole – exactly the point that I was making. This is an important point because the court had already ruled that there were no physical injuries to Ms. Murphy. So, she had no physical injuries as a result of her distress and was better off financially after the ruling.
The court did not say, in its opinion, that this “accession to wealth” argument was not correct, as Mr. Colapinto implies in his comments, rather it skirted the issued by stating “rather than ask whether Murphy’s award was an accession to her wealth, we go to the heart of the matter, which is whether her award is properly included within the definition of gross income in § 61(a), to wit, ‘all income from whatever source derived.’” The court then ruled that gross income includes awards for nonphysical damages.
To the extent that my characterization that this was punitive rather than compensatory was incorrect, I apologize. However, I think you see where I was going.
All of that said, I can’t let Colapinto’s claim that “[t]he court ruled that all awards for personal injury are now taxable” go unanswered. The court did not make that ruling. I re-read the opinion today and stand by that claim.
